Recommend a tracker..?

C_Mababejive

My initial thoughts are trackers with low volatility/lower risk FTSE 100 type tracker. I had a look at the HSBC unbundled product which seems good? Any others please?

Archi_Bald

Freshly updated Monevator blog on the subject: http://monevator.com/low-cost-index-trackers/

bowlhead99

I don't really have much more to add over that great list from Archi / Monevator.

However, obviously some of those on the list are ETFs bought through a brokerage (or the broker part of a platform) rather than Funds that sit on a platform. The type of investment vehicle that's the most efficient to hold might depend on how frequently you intend to buy and sell. For example ETFs will generally require you to pay a buying and selling fee which can make monthly investing into them pretty inefficient, together with an annual broker fee (in some cases); while Funds may have no transaction fees but attract an annual percentage charge from the platform.

Obviously there are exceptions to how the brokers and platforms structure their fees and you might be paying flat fees or percentage fees or a combination of annual and transaction based fees depending on the amount you have to invest and what works for you. But the raw Ongoing Charges Forecast figures from Monevator gives you some choices to get you started.

Still, your comment below is showing some confusion or naivety, not sure which:

initial thoughts are trackers with low volatility/lower risk FTSE 100 type tracker.

Trackers can have low 'tracking error' i.e. stick quite closely to the index they are trying to track. But that is nothing to do with volatility or risk. A FTSE 100 tracker is neither low volatility nor low risk.

It is based on an index weighted to the largest companies which happen to be listed in the UK (many of them with a large proportion of costs and revenues from overseas, denominated in a myriad of currencies) and which has a heavy concentration in a limited number of industries; it can go up or down by 40% in a year quite easily and take several years to recover depending on prevailing economic conditions.

Doshwaster

Personally, I prefer the FTSE 250 as it is more diverse

Rollinghome

Doshwaster wrote: »

Personally, I prefer the FTSE 250 as it is more diverse

Than?

Not as diverse obviously as the FTSE All-Share index which combines the FTSE 100, the FTSE 250 and the FTSE Small Cap indicies. Nor as diverse as the various FTSE/MSCI All-World indices.

You might find this explanation of the various UK indices useful: http://www.ftse.com/products/indices/uk

bowlhead99

The 250 is definitely more diverse across companies; for a start, there are 250 companies instead of 100 and the top 10 holdings only make up about 11% of the index. Whereas in FTSE100, the top holding HSBC is over 7% of the index, and by the time you've added in Shell and BP at 5-6% each and GSK and BAT at 4% each, that's a quarter of your investment in just 5 companies. The top 10 holdings cover over 40% of the index. (data at end of August per FTSE factsheets - follow Rollinghome's link)

So, FTSE 250 is more diverse in that sense, but in another sense it's less diverse - more UK centric with less international interests. For example the biggest in the 250 last month was Direct Line at 1.6%, a UK-focussed insurance company; next Taylor Wimpey; then Dixons/Carphone Warehouse etc. A lot more UK stuff in there which is good if you want broad UK exposure but not so good if you're trying to get a global spread.

By industry sector the 100 is pretty unbalanced - we tend to think of it being very overweight oil/gas (17%), banks and financials (22%) and high in chemicals/resources (9%) while being pretty low in areas like technology (1%). However you can look at the 250 and accuse it of having even more in financials (>30%), lots in industrials (20%) and quite a lot in consumer services like retail, media, travel etc (17%). Which of these, if any, is the 'right' proportion? Not a simple question.

The FTSE 250 covers more companies but in terms of all the investible share capital that's listed in the UK, it's 'only' £300bn out of 2.1 trillion in the all-share index, while the FTSE100 is £1.7 trillion. With a median company value of £1bn instead of £8bn, the 250 is smaller companies which can be inherently more volatile, growing more than the FTSE100 in good years and declining more in bad years.

As an aside, Rollinghome said in reference to the FTSE250:

Rollinghome wrote: »

Not as diverse obviously as the FTSE All-Share index which combines the FTSE 100, the FTSE 250 and the FTSE Small Cap indicies

As I suggested above, you could look at diversity in different ways but if we agree that the FTSE100 is not very diverse at all (massive concentration in the biggest 5-10 companies) then the FTSE All-Share also suffers the same fate because it is capitalisation-weighted and a massive proportion of it is the FTSE100 while only a small proportion is the 250 and smallcap. So it depends what we mean by 'diverse' - by company, sector, size, geography, exposure to currencies and international markets etc.

But back to my train of thought -

So, "low volatility/lower risk FTSE 100 type tracker" does not exist. The 100 or 250 do not strike me as low volatility, low risk. Volatility can be reduced by investing in multiple countries and multiple asset classes on the basis that they won't all be correlated with each other. When talking about the FTSE share indexes above, I mentioned that they were about 0.3tn or 1.7tn of the £2.1tn market value in the All-Share. However they are 0% of the £trillions of bond investments out there, because they only look at a single asset class, equities. Bonds are more suitable than equities if stability / low volatility is a goal and these indexes don't have any.

If you look wider to the FTSE All-World index, you're then looking at 3000 companies and $38 trillion of market cap, not just £2 trillion. So most would agree that's even more diverse than an index of UK listed companies. Because massive tech firms are big in global markets (the Apples and Facebooks and Microsofts and IBMs and Googles and Alibabas and Amazons and Samsungs), the global 3000 has 10% in technology, quite a contrast to the FTSE100 which only has 1% or the FTSE250 which has 3%. Again, it doesn't mean that weighting is 'right' for you as a private investor who is only trying to deploy a few thousand quid. Of course, the nature of the All-World in producing a cheap-to-manage capitalisation- weighted index means that just like the UK indices, it's still heavily tilted to the performance of a few companies.

I mentioned that the FTSE 250 had over a tenth of its value concentrated in just 10 companies, which is clearly broader than the FTSE100 but a lot of value to be concentrated in one twenty-fifth of the companies that the index tries to track. Would you do a lot better by looking at other more global indexes?

The answer is, not necessarily. In the All-World, instead of having 1.6% in Direct Line, you have 1.6% in Apple. Is that tech firm any more 'stable' than the insurer?

Certainly it's bigger. The All-World has about a twelfth of its market cap (8%) in the top 10 investments because some of them are monsters, like the $600bn titan Apple. But that means its performance is very heavily tilted to those big hitters rather than the other companies in the 3000-strong index which only have a median market cap of $4.6bn. The top 10 that dominate the World index are, by number, only a three hundredth of the number of companies that have some sort of presence. The smallest developed-world company in the index is $125m and the smallest emerging-market company is even smaller. So if you bought that index you have 5000 times the exposure to Apple than you do to the 'tiddlers' and in practice the tracker funds won't bother to hold the smaller ones because there is no point. But you do get a lot more geographic spread than if you invested in something that could only get exposure to companies that happened to have located their market listing in London.

Does any of this help you choose what index to invest in first? Perhaps not. Certainly neither the UK100 or UK250, nor the UK Allshare, nor the world developed or all-world indexes give you a balanced portfolio out of the box, because that's the nature of a cap-weighted index. And an equal-weighted index tracker would be more expensive and impractical to run at low cost. So really it's hard to just 'pick a tracker' to create a portfolio.

If you have lots of other types of investments and obvious gaps in some markets, you could look to buy a tracker(s) for that market to fill the gap(s). But to find one tracker to be your first holding and cover all bases is pretty impossible if you want it to be equities focussed and low volatility. If you only want to buy one fund for now, I'd suggest abandoning the idea of using a tracker and get a multi-asset fund.

If you must have a single tracker and are aiming for equity exposure with low volatility, Blackrock iShares do a low fee ETF investing in the 'MSCI World minimum volatility index'. It is not a particularly well known index - the top holding at 1.6% is Johnson & Johnson, followed by Novartis - big healthcare firms and perhaps relatively stable. McDonalds is also in the top 5. You'd expect healthcare and consumer staples to be more stable than something trend/tech-focused like Apple. However, on a geographical view the index has over half its holdings in the US and only a thirtieth of its holdings in the UK so it's a far cry from where you started at a 'FTSE100 type tracker'.

Finally one option to leave you with, would be funds-of-tracker-funds where a manager selects a mix of in-house trackers through one means or another to create a portfolio with some geographical and/or sectoral balance. The fees are typically higher than single trackers but it saves you manually rebalancing between holdings all the time. Having an out-of-the box allocation across underlying tracker funds doesn't necessarily mean the mix will be right for your goals , but it could be, and some people use them as core holdings when starting a portfolio if they don't like the idea of paying more for an active manager to have a more discretionary role in managing the asset mix. In fact many investors would keep them as a core of a portfolio even if they hold other active or passive investment vehicles alongside to tweak the weightings to different asset classes.

Examples of these would be Blackrock Consensus 85 (up to 85% equities but can be less depending on market mood - thus the 'consensus' in the name) or Vanguard Lifestrategy 80 (generally 80% equities).