cheap Index Trackers, where to find?

Ryan_Futuristics

bowlhead99 wrote: »

That's true. But the fact that the new investors (rather than all the investors en masse) are picking up the costs associated with their admission to the fund, lowers the general running cost for an investor who buys and holds. Therefore, for those investors who stick around, they'll find the fund can keep closer to the underlying index return rather than continually lag it (as a fund who had all its investors bear those charges, would have to).

If you can pull those charges out of the overall performance numbers and just attach them to new contributions they'll give a 'fair' effect to everyone. An explicit levy is painful for transient investors who drift in and out. Obviously if you are constantly adding cash each month you are always paying those charges so you don't match the overall performance chart, but after 60 months at £100 a month you'll only be paying a few pence of dilution levy on each new monthly chunk, while your existing £6000 is not attracting any further costs. Without the dilution levy, they would be splitting all those charges over everyone, and you as a LTBH investor would get a lot of them because you are a relative bigger holder than someone who just drifts in and out of ownership, attracting costs but never sticking around to pay them.

I still see total returns slightly lagging L&G's index though (and although we're talking tiny charges, it is 25% cheaper)

For me, if I had say a global, UK and bond index tracker, with 0.2% levies on each, then every year when you come to rebalance, you are potentially pushing that annual charge up a fair bit

(Presumably the levy doesn't apply to the accumulation fund, but I imagine if you were manually reinvesting dividends, you could call your 3.4% dividend a 3.2%?)

bowlhead99

Ryan_Futuristics wrote: »

I still see total returns slightly lagging L&G's index though (and although we're talking tiny charges, it is 25% cheaper)

I can see that paying 0.06% for L&G class C is only 75% of the charge of 0.08% for Vanguard. On each £10,000 invested, you only pay £6p.a. instead of £8 so that's a saving.

However, 'saving a quarter of your charges' is probably the wrong way to look at it. The fees are only of interest to you at all because they affect your returns... so you need to see what happens to your returns that the managers are paying you.

Assuming you get a gross annualised return of 8% pre charges, that's £800 of gross unrealised income/gain. Net of the £6 or £8 running costs you have £794 with one manager and £792 with the other manager. So ignoring other tracking errors and presuming the exact same underlying returns, the 'cheap' manager gets you the best net return possibly available at £794 while the other manager paying your gets you 99.75% of that return when he 'only' delivers £792.

So, rather than thinking of it as 'saving a quarter of my charges' with the cheap manager, you should think of it as 'losing a quarter of a percent of my income' with the marginally more expensive one. Not a quarter of the income, not a quarter of a percent of my assets, but a quarter of a percent of my income. It is so small as to be meaningless, immaterial to your annual profit.

In any case if you look at the 0.06% for L&G class C, you can only obtain that by going to the highest priced platform. On 'normal' platforms that don't offer that supercheap version, you pay 0.10% for L&G class I instead. Which is 25% more expensive rather than 25% cheaper than the Vanguard at 0.08%.

You mentioned you are happy with quality of service, free fund dealing and level of fund discounts at Hargreaves which is why you don't mind paying 0.45% p.a. with them instead of the 0.25% you could get somewhere like Charles Stanley Direct (which also has free fund dealing). But the fund discounts on a cheap fund like this are nowhere near big enough to offset the extra platform cost. Basically to hold L&G class C you have to pay 0.45%+0.06% = 0.51%. Admittedly this is better than 0.45%+0.08% = 0.53%. But cost conscious people who were looking at the overall charges would have gone to a cheaper platform. So, where the cheap L&G class C is not available, the choice would be to pay 0.25% +0.10% for L&G Class I = 0.35% while it's only 0.25% +0.08% = 0.33% for Vanguard.

So, L&G only beats Vanguard on AMC if you ignore platform fee and once you bring platform fee into the equation and move to a cheaper place, Vanguard beats L&G instead.

For me, if I had say a global, UK and bond index tracker, with 0.2% levies on each, then every year when you come to rebalance, you are potentially pushing that annual charge up a fair bit

(Presumably the levy doesn't apply to the accumulation fund, but I imagine if you were manually reinvesting dividends, you could call your 3.4% dividend a 3.2%?)

You're overstating the impact of the levy here. Imagine you get £340 divs on your £10,000 investment. When you reinvest that £340 you would pay a 0.2% charge on the £340, not on the £10,000. You would lose only 68 pence to the levy, not £20.

So, that doesn't turn a 3.4% divi into a 3.2% divi. It turns a 3.4% divi into a 3.3932% divi which is basically the same. In AMC terms if the usual annual cost was previously 0.08% (or 0.33% including platform charge) then it still hasn't moved the needle as high as 0.09% AMC or 0.34% inc.

Similar when you look at rebalancing. Let's say you had 30,000 across global equities, UK equities and bonds with 10k in each. Lets say the global equities deliver 10% (£1k) while the UK equities only deliver 8% (£800). To bring the allocations back in line you need to shift £100 from global to UK so that you end up with £10,900 in each pot. On that £100 shifted, you pay 0.2% dilution levy. The cost of that is 20 pence which on your £30,000 portfolio is basically nothing.

Meanwhile on the £10800 of one fund and £10,900 of the other fund that doesn't need to get shifted, you are getting an improved annual performance because new joiners to the funds are paying entry fees to cover the funds' stamp duties and transaction costs while you the existing holder do not pick up those costs.

Just for completeness, the dilution levies are only charged on the UK funds holdings, principally to cover stamp duties, so you don't pay them on the World ex-uk parts of your portfolio. Although the dilution levy on the UK bonds is currently running higher than the 0.2% on the UK equities. So rebalancing into UK equities costs you something, rebalancing into bonds costs you more, rebalancing into global equities costs you nothing.

The size of the dilution levies will change over time and it's likely that in years where more people are moving into UK bonds (subscriptions well exceeding redemptions) the levies will be lower there while at the moment the levies are lower on the UK equities

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To the OP, basically if you are doing a long term buy and hold, you don't need to worry too much about dilution levies or small fractions of a percent on annual management fees. Yes it all adds up, but whether you get your UK index fund from L&G or Vanguard or HSBC as the tracker manager you are likely paying <0.2% a year for that element of cost, while you will be paying more than that in platform fees. You should aim for a provider that makes it cheap to buy funds monthly and hold them (i.e. no explicit transaction fee, and as small an annual platform fee as you can find).

And I would still re-iterate the point that a single country index is not particularly high quality investing, most people would diversify further. Because there's no point in thinking you found a great deal by finding the absolute cheapest possible fund to hold (UK or US tracker costing 'only' 0.1%), when you are only exposed to one market. If your specialist market of choice delivers a return of 10%, 5%, -40% while a more balanced global equities fund or multi-asset fund delivers a return of 15%, 10%, -35%, your shortsighted focus on fees has cost you 5% p.a. Fees are important but less important than having a balanced and diversified set of holdings, IMHO.

masonic

Ryan_Futuristics wrote: »

(Presumably the levy doesn't apply to the accumulation fund, but I imagine if you were manually reinvesting dividends, you could call your 3.4% dividend a 3.2%?)

Well the "3.4%" is calculated vs the value of the investment, and 0.2% of 3.4% is 0.0068%, so you could call it a 3.393% dividend if reinvested manually (and assuming you don't use the platform's automatic reinvestment, which would cost 1% at HL, which is not a 2.2% dividend but a 3.359% dividend).

I'm not keen on dilution levies either, but I think pushing someone towards HL to save 0.04% when they will be paying 0.2% more in platform fees compared with, say CSD, actually leaves them paying more overall.

I disagree with the view that HL has a monopoly on good customer service. Sure, there is one notable platform that is lacking in that area, but others seem to be doing fine.

ChopperST

Ryan_Futuristics wrote: »

I'm in the process of opening a deprogramming centre for Vanguard devotees



Personally I find tracking error a slightly meaningless concept - a tracker is effectively one of the worst portfolios you can own (using almost any variable other than market cap to weight an index tends to result in better returns ... essentially because you're picking up more undervalued stocks)

There's nothing sacred about a cap-weighted index (it's just used as an example so often because it produces such mundane returns)

Ryan would you care to elaborate on this a little more.

As a biologist rather than a economist I researched alot before I decided to start investing. My research time and again showed me that a strategy of losing the fewest points via cheap index trackers was the best approach over the long term and this is supported by long term empirical data as there is no way to pick stocks or fund managers who will do well over a long term period.

I watch with interest your posts and also bowlheads excellent replies to try and learn more.

I semi-comprehend your use of CAPE weightings and do top up my own portfolio, like last month when the markets dip but I do stick to my geographical allocations when doing so - I recall you saying that you were only invested in the US to the tune of 2-3% if I remember correctly - yet the US has produced some of the strongest returns over the last 5 years? Does that mean that you bought in after the GFC and sold at some point acording to CAPE?

Also if I may ask if you don't believe that a passive portfolio is the way to go - how do you manage yours? Is it with individual stocks or funds - I know you like the new Woodford. I was also be interested in any peer reviewed empirical data you could share that I could read which could give some balance to the passive investment arguments that are so strongly held.

Hope this makes sense!

Linton

ChopperST wrote: »

As a biologist rather than a economist I researched alot before I decided to start investing. My research time and again showed me that a strategy of losing the fewest points via cheap index trackers was the best approach over the long term and this is supported by long term empirical data as there is no way to pick stocks or fund managers who will do well over a long term period.

......
but I do stick to my geographical allocations when doing so

I dont share Ryan Fs, OTT in my view, enthusiasm for CAPE but do share his suspicion of trackers as THE way to go.

You have demonstrated the main reason for my suspicion in your posting. If you were a true devotee of trackers you would surely only buy a Global Cap Weighted Index tracker as anything else involves you out-guessing the market with the extra costs of rebalancing. Why do you believe that managing on a geographical basis is worthwhile for you?

Just like you believe allocation to geographies is important, I believe allocation to other subdivisions of the market is significant. In particular industry sector and company size. My type of allocation is becoming more important than geographic allocation as the global market ensures that there is a high correlation across different geographies, particularly in the share prices of the large companies that trackers ensure you buy.

The trouble with trackers is that they make sector and size allocation difficult. Going for a FTSE tracker you are as Bowlhead pointed out heavily weighted towards a few apparently arbitrary industries. Going for a US tracker you have a major commitment to Apple, Google, Facebook etc which in my view are grossly overpriced.

So its not a question of picking good individual shares or fund managers which I agree cannot consistently be done, its ensuring that one's diversification matches ones requirements for the portfolio.

Rollinghome

Ryan_Futuristics wrote: »

Yeah, for me, Hargreaves is good value weighed against the quality of service...

Doesn't that very much depend on several factors, not least, how much you have invested with them?

If you have only a very small sum to invest then, for you, they may be good value but that is less likely to be the case for larger investors.

If you do have a largish amount to invest then you are unlikely to be getting good value unless HL agreed a special arrangement, as they did with me and several others on this board, to reduce their platform fee from 0.45% to 0.20-0.25% across all tiers. Without such an arrangement then you would be paying through the nose.

If you need help with comparing costs of platforms then I'd recommend the excellent spreadsheet constructed by and available from SnowMan.

puk999

Linton wrote: »

The trouble with trackers is that they make sector and size allocation difficult. Going for a FTSE tracker you are as Bowlhead pointed out heavily weighted towards a few apparently arbitrary industries. Going for a US tracker you have a major commitment to Apple, Google, Facebook etc which in my view are grossly overpriced.

This got me wondering if there's a US index that excludes those really big tech companies, or holds them in watered down proportions? So everything else is market-capitalisation based apart from the behemoths at the top? I realise the answer is probably no, but I also think those companies are bloated but love the low cost and simplicity of index investing.

Are most stock indices market-capitalisation based? What other approaches are commonly used?

TheTracker

Ryan_Futuristics wrote: »

With a 0.2% entry fee - a lot of the Vanguard marketing material is aimed at the US (over here they're often on the expensive side for trackers)

Really? Ryan Futuristic does enjoy sounding definitive without evidence at times. The entry fee is less of a concern for long holders.

Domestic equity: Vanguard cheapest by 0.01%
Domestic value equity: Vanguard cheapest by 0.08%
World equity: Vanguard loses out to Fidelity by 0.08%
World value equity: Vanguard cheapest by 0.16%
World small cap Equity: Vanguard cheapest by 0.07%
International ex-UK equity: Vanguard cheapest by 0.11%
Emerging markets equity: Vanguard loses out to Amundi by 0.05%
UK Gov mixed duration bonds: Vanguard cheapest by 0.03%
UK Gov long duration bonds: Vanguard equal cheapest
UK index linked bonds: Vanguard cheapest by 0.01%
Global bond (gov/corp mix): Vanguard cheapest
UK corporate bonds: Vanguard cheapest by 0.02%

This all comes from monevators low cost tracker page.

Ryan_Futuristics wrote: »

Legal & General UK Index is 0.06% with no bid/spread or entry fee (which makes a big difference when rebalancing)

The entry fee only matters if you sell and buy back, not if you only buy through rebalancing. Personally I add enough each year to always always only have to buy less, not sell, of any tracker. Dependent on your rebalancing strategy.

TheTracker

puk999 wrote: »

This got me wondering if there's a US index that excludes those really big tech companies, or holds them in watered down proportions? So everything else is market-capitalisation based apart from the behemoths at the top? I realise the answer is probably no

The FTSE All share is comprised of the 100, 250 (that's the next 250 not first 250), And smallcap (another 250 odd). You can buy them separately if you wish to limit the influence of the 100 or add exposure to say mid caps.
I don't think there is such a thing to strip out the top 10 or 50 or particular sector.

Kendall80

You might want to check when that data on Monevator was last updated.


Fidelity, blackrock and L&G may well have dropped their charges since.


As for Ryan sounding definitive... this is a forum on which people with differing personalities are putting forward their views with varying degrees of conviction. Some with more experience than others. IMO the onus is on the reader to interpret / research any views they are interested in. Personally, I'm glad that people put themselves and their views forward with the risk of being 'slapped down' by their peers