The UK’s most expensive tracker funds charge around 10 times as much as the cheapest, according to new Which? research.
A recent Which? Money study noted a £1,962 gap between the best and worst returns on £10,000 invested in a FTSE All Share tracker over the past five years.
These funds, which offer low-cost exposure to stock market growth at a time when savings rates are at an all-time low, are becoming increasingly popular. They now account for 10% of the market, with £83bn invested.
But with such a huge difference in potential returns, it’s important to know what you’re doing.
If you are thinking of investing in a tracker fund, here are five key points to bear in mind.
1. Check your index – what will you be tracking?
Tracker funds aim to mirror the performance of the stock market by following an index. There are hundreds of different indices to choose from. The FTSE All Share index includes all British firms listed on the London Stock Exchange. The FTSE 100 index shows the growth of the 100 largest companies in the UK.
Other indices track different parts of the world. The S&P 500 reflects the New York Stock Exchange, for example. Emerging Markets indices covers company shares in countries such as Brazil, Russia, India and China.
Find out more: What is a tracker fund? – the lowdown on this increasingly popular investment
2. Don’t pay too much for the fund – not all are cheap
A tracker fund’s charges are made up of an annual management charge levied by the fund company, as well as legal and audit fees that create what’s known as an ongoing charge figure (OCF). Fortunately for investors, tracker funds have cut their charges consistently in recent years.
Vanguard’s long-established UK Index tracker now charges 0.08% a year, while Scottish Widows’ Foundation Growth All Share tracker has an OCF of 0.09%.
Other FTSE All Share tracker fund charges range between 0.3% to 0.5%, although some charge more. Halifax and Virgin charge 1% a year for their FTSE All Share tracker funds.
3. Don’t pay too much for the platform – charges vary here too
Most investment supermarkets charge a percentage fee based on the amount you invest. This can range from 0.2% to 0.45%. You pay this annually in addition to any fund charge, so a cheap fund charging 0.15%, with a 0.2% platform charge added in, actually ends up costing 0.35%.
Some supermarkets charge a flat annual fee. If you’ve got £10,000 or less to invest, it’s best to avoid these as they disproportionately increase your costs. For investors with more, fixed-fee supermarkets offer a much better deal.
Find out more: Fund supermarket reviews – we have rated 14 of the major players in this market
4. Don’t put too much in a single fund
To spread risk across your portfolio, it’s important to diversify your assets. Most investors combine shares (equities) and bonds. Investing in different regions and countries can reduce the impact of stock market falls, as you won’t be overly affected by the economic conditions of a single country.
You can use tracker funds to build a diversified portfolio, with indices that specifically exclude the UK, for example. Alternatively, you may want to track defined geographical areas, such as Asia-Pacific funds or North America funds.
5. Hold your investments in an Isa
Funds held in a stocks and shares Isa are exempt from capital gains tax when you come to sell them. The annual allowance is now £15,000, so you can use your Isa to hold a fair slice of your holdings – adding more to the sheltered total each year.
Find out more: Stocks and shares Isas explained – learn more about this tax-free investment wrapper