Choosing between different index tracker funds

MaisR

Hi all,

Just a quick question. While I am doing some research for my investments portfolio and I am looking into different index tracker funds how can I decide if fund A is better/worse than fund B? What important pieces of information do I need to be looking out for?

Thank you.

Superscrooge

If Fund A and Fund B both track the same market then charges are your major consideration.

eg. Virgin have a FTSE All share tracker than has an annual charge of 1%. Fidelity FTSE All share tracker only charges 0.06%

https://www.fidelity.co.uk/investor/tracker-funds/our-range.page

This 0.94% difference in annual charge makes a huge difference over the long term.

george4064

Other things you might want to consider when comparing index tracker funds;

- Tracking error (how much the fund performance differs from the actual performance of the index it is tracking)
- Whether the fund is a full replication or an optimised replication of the index
- Whether the fund holds physical assets or if it uses derivatives/swaps to gain exposure to the underlying securities.

MaisR

Thank you very much both of you.

tg99

You might also want to consider gaining exposure to the desired market index via an ETF as opposed to a mutual fund.

darkidoe

tg99 wrote: »

You might also want to consider gaining exposure to the desired market index via an ETF as opposed to a mutual fund.

How is this an advantage over index funds over the longer term? Are costs for ETFs generally lower?

bowlhead99

darkidoe wrote: »

How is this an advantage over index funds over the longer term? Are costs for ETFs generally lower?

ETF ongoing management fees have historically been a bit lower than OEIC/ UT ("traditional /mutual Fund") management fees. But there now plenty of cheap ones available of all types so the cost advantage of ETF has narrowed. However, if you are investing larger amounts of money, then yes the overall cost of ownership can be quite a bit lower.

ETFs as the name suggests are traded on a stock exchange. Like any share in a public listed company, you don't need an 'investment platform' to hold shares in an ETF. You can just pay a one time stockbroker fee to buy as many shares as you want. And then a fee later when you sell or partially sell.

So for example if you had £100k invested in an ETF for a couple of years it would cost you 0.1% annual management fee (£100 a year assuming it didn't grow or shrink significantly over time, £200 total) and it would cost you a broker fee to buy at the beginning and sell at the end.

But if you had £100k invested in a Fund on a Fund Platform you would still get the same £200 of management fees from the manager but you are also likely to have to pay a significant amount of platform fees over the two years because many platforms charge percentage-based fees for holding funds, or some fixed recurring annual fee for platform access. Those platform fees may dwarf the buy/sell costs of the ETF.

Whereas holding an ETF in a nominee account via some stockbrokers or platforms can sometimes be completely free on an annual basis ; and you could always pay a bit more to hold a physical paper certificate and therefore not need any ongoing service from a broker at all.

coastline

Superscrooge wrote: »

If Fund A and Fund B both track the same market then charges are your major consideration.

eg. Virgin have a FTSE All share tracker than has an annual charge of 1%. Fidelity FTSE All share tracker only charges 0.06%

https://www.fidelity.co.uk/investor/tracker-funds/our-range.page

This 0.94% difference in annual charge makes a huge difference over the long term.

I'm thinking the Virgin charge is the overall package and is 1%..
Fidelity would charge 0.06% plus the platform charge which is 0.35% unless you hold less than £7,500.
A big difference but its still early days in the field of platforms.

https://www.fidelity.co.uk/investor/research-funds/fund-supermarket/factsheet/fees.page?idtype=ISIN&fundid=GB00BJS8SF95&UserChannel=Direct

Another thing I've noticed is the dividend yields on various funds especially when tracking using a global fund as they can differ.
In the above example of Fidelity and Virgin the performances of both are showing 2.8% net dividend for the FTSE fund ?

dunstonh

A big difference but its still early days in the field of platforms.

They are 15 years old now. And some of the earlier ones are now beginning to suffer software issues that will be costly to sort out and some have been looking for buyers as their owners dont want to pay. There has been an expectation for years that some platforms will start to fail and there will be consolidation with platforms but nothing has happened yet. The FCA has been getting heavy on due diligence requirements with advised recommendations on platforms. Some think its because the regulator doesnt understand platforms whilst others feel the regulator is being proactive and trying to ensure that a platform failure doesn't result in mass complaints about advised sales. DIY sales, of course, dont have to worry about that as the individual is responsible for their own research.

In respect of ETFs, remember that there are more risks to consider than a UT/OEIC. Indeed, its possible to have a synthetic ETF that doesnt hold any assets of the index you are tracking.

coastline

dunstonh wrote: »

They are 15 years old now.

Thanks for your reply...I was meaning the recent changes as I'm guessing its still possible for Virgin to reduce their 1% fee to say 3/4% and Fidelity to increase their 0.35% fee.

darkidoe

bowlhead99 wrote: »

ETF ongoing management fees have historically been a bit lower than OEIC/ UT ("traditional /mutual Fund") management fees. But there now plenty of cheap ones available of all types so the cost advantage of ETF has narrowed. However, if you are investing larger amounts of money, then yes the overall cost of ownership can be quite a bit lower.

ETFs as the name suggests are traded on a stock exchange. Like any share in a public listed company, you don't need an 'investment platform' to hold shares in an ETF. You can just pay a one time stockbroker fee to buy as many shares as you want. And then a fee later when you sell or partially sell.

So for example if you had £100k invested in an ETF for a couple of years it would cost you 0.1% annual management fee (£100 a year assuming it didn't grow or shrink significantly over time, £200 total) and it would cost you a broker fee to buy at the beginning and sell at the end.

But if you had £100k invested in a Fund on a Fund Platform you would still get the same £200 of management fees from the manager but you are also likely to have to pay a significant amount of platform fees over the two years because many platforms charge percentage-based fees for holding funds, or some fixed recurring annual fee for platform access. Those platform fees may dwarf the buy/sell costs of the ETF.

Whereas holding an ETF in a nominee account via some stockbrokers or platforms can sometimes be completely free on an annual basis ; and you could always pay a bit more to hold a physical paper certificate and therefore not need any ongoing service from a broker at all.

So what would be the best way to go if you start building up your portfolio in mutual funds and then when you reach a certain threshold where its more beneficial to hold etfs, to transfer your whole portfolio to ETFs?