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Picking an index tracker out of the investing swamp

You want to invest in an index tracker, but doing a Google search for one is like parachuting out of a plane and into the thick of the Amazon jungle. You’re likely to sink up to your pith helmet in the swamp of choices, claims, and small print competing for your attention.

As a new passive investor taking your first steps in this environment, you don’t need a tracker – you need a map.

How I first felt when looking for index trackers

Waypoint 1 – Searching for an index tracker

Many investors select funds using the search tools of their broker. I prefer to use an independent fund-screener like Morningstar, since no one investment platform coughs up the whole of the market.

Refining your search requires differing tools and techniques depending on whether you’re looking for index funds or Exchange Traded Funds (ETFs). Here’s some handy search tips for both:

Waypoint 2 – Recognising your quarry

Picking out index funds from the morass requires sharp eyesight because they’re just lumped in with all the razor-clawed, actively-managed beasties we’re trying to avoid.

Life would be easy if search tools offered a handy ‘tracker-only’ tick box. But such an easily implemented, investor-friendly feature is mostly absent (although TD Direct have one in their Fund Screener). What we’ve got instead is the financial services equivalent of placing cheap, own-brand products on the bottom shelf of the supermarket aisle.

The most reliable tracker-spotting technique is to look for funds with the word ‘index’ in the title. As in ‘HSBC FTSE All Share Index fund’.

Not every fund with index in the title will be a tracker, but other clues can be found in the Ongoing Charge Figures (OCF) – sub 0.5% suggests a tracker – and in the fund’s factsheet (more on this below).

Adding to the profusion of confusion, identically named funds breakdown into sub-species such as:

  • Institutional
  • Non-institutional
  • Accumulation
  • Income

Institutional funds sport cheaper costs but are aimed at giant pension funds and the like. Beer money investors like you and me usually don’t get a look in.

There are weird exceptions to the rule. Some investment platforms have the muscle to make institutional funds available to retail investors en masse. So if you’ve spotted a particularly juicy looking institutional product, it’s worth searching for it via a couple of different platforms to see if you strike lucky.

As for accumulation and income funds, they are two different classes of the same product. The designation refers to the fund’s treatment of dividends.

  • An income fund pays out dividends into your account, as you might expect.
  • An accumulation fund retains dividends, using them to swell the share price. It’s the equivalent of reinvesting your dividends into the fund – a very good idea as that’s a major component of long-term investing returns. Accumulation funds also save you paying the dividend reinvestment charges your broker loves to levy.

Look out for acc and inc suffixes in a fund’s name (as listed by your platform) to spot the difference.

The ETF equivalent of an accumulation fund is generally called a capitalising ETF, while a distributing ETF pays out dividends like an income fund.

Waypoint 3 – Compare trackers

You can make sure a fund tracks the asset class you require by reading its Morningstar Fund report (click on the fund’s name in the fund screener to access). The report reveals important information on the fund’s benchmark, fees, performance, holdings and so on.

You can also quickly compare similar funds with Morningstar’s handy Fund Compare tool – enabling you to scrutinise characteristics side-by-side.

One important characteristic are fund charges. Smoke and mirrors are two of the industry’s favourite tools for diverting attention away from the impact of charges. Different layers of charges can make it hard to directly compare funds, but you can level the playing field with a Fund Cost Comparison calculator.

Waypoint 4 – Due diligence

Once a fund is ticking your boxes, it’s time for a trip to the individual fund provider’s website to immerse yourself in the literature. Take a deep breath and read all the documentation posted against that fund:

  • Factsheet (click on the link to find out how to decode a factsheet)
  • Supplements
  • Prospectus (you’ll need a law degree to understand much of this)

Read as much as you can to gain a deeper understanding of the fund. The advantage of using a fund’s own website is that you’ll access the most up-to-date literature – hopefully weeding out some of the errors that bedevil aggregator sites like Morningstar.

The fund’s factsheet should also definitively reveal whether you’re dealing with an index tracker. A tracker’s stated profile or strategy should outline an objective that’s something along the lines of ‘tracking or matching its benchmark’. If you’re still not certain by time you’ve read all the documentation then the fund is probably not a tracker.

Waypoint 5 – Buy it!

All the hard work’s done and it only remains to place an order for your shiny new tracker with your fund supermarket or discount broker.

Make sure they carry it by searching their website using the fund’s ISIN code.

If your target fund isn’t listed on your dealer’s website, and you don’t want to use multiple investment platforms, then there’s one last hope: get on the phone. As Monevator readers William and Ben have noted: some platforms don’t list all available funds online, but they will deal in the missing products over the blower.

If you’re still stuck when it comes to picking index trackers then take a look at Monevator’s Slow & Steady model portfolio. It’s a good short-cut to a shortlist.

Take it steady,

The Accumulator

Series NavigationChoosing an investment platform: A nuts and bolts guideHow to choose the best index trackers #1: Basics

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{ 13 comments… add one }
  • 1 William June 7, 2011, 6:35 pm

    My thanks go to The Accumulator – fame at last my name being mentioned in an article. Many thanks.
    I have pointed a number of people in the direction of the Monevator site as having visited a number of sites – I have found this site the most relevant, especially as many other sites/blogs are US focused.
    HSBC have confirmed to me that they still have plans for the launch of a Global Bond Index fund and a Emerging Markets Index fund – the only problem in my eyes being when!
    Perhaps your content could be reproduced in a book as done by Mike Piper of The Oblivious Investor (US).

  • 2 The Investor June 8, 2011, 8:59 am

    Thanks for spreading the word William. The book idea is one we kick about now and then. With the dearth of UK focussed passive investing resources, I agree The Accumulator’s articles could be just the ticket.

  • 3 Alex June 8, 2011, 3:38 pm

    After the book, how about the film of the book?

  • 4 Ross @ Go Be Rich June 9, 2011, 2:43 am

    It’s funny that when people ask for my advice on what to invest in and how to go about it, I tell them to do pretty much what you’ve outlined here… mainly, just to do the homework involved in picking their investment, I mean, it’s their investment after all. About half of them begin to realize that this is much more work than they thought it would be and give up, unfortunately.

  • 5 Dave June 9, 2011, 6:52 am

    Another great post. Thanks very much – really enjoying your posts at the moment. I am just ahead of them in the process, and it’s very nice to be able to double check what I have been doing with your advice.

    People might also like to read your previous post on the importance of tracking error when choosing a tracker, and how that should really be our number one criteria – followed by TER perhaps?

  • 6 The Accumulator June 11, 2011, 12:25 pm

    Thanks all. Must admit the ‘homework’ factor has torpedoed the aspirations of quite a few potential DIY-ers of my acquaintance. It really isn’t as easy first it appears mainly because the information is so fragmented, confusing and open to interpretation. I suppose I’m trying to fill in that gap as best I can, and hopefully reduce the barriers to entry.

  • 7 Trevor Dewhurst December 10, 2012, 9:02 pm

    Does anyone know why the Royal London FTSE 350 Tracker A (UK Large-Cap Blend Equity ) has such a low Morningstar rating? On first look it rather looked like a decent index tracker to me…

  • 8 Pete March 15, 2013, 10:41 pm

    Great post. The fund cost comparison calculator link is broken, it should now point to here:

    http://www.candidmoney.com/calculators/investment-fund-cost-comparison-calculator

  • 9 Compounder June 21, 2013, 7:03 pm

    I’m trying to avoid paying the 0.35% fund charge that TD Direct is going to start charging on all OEICS and Unit Trust, so I’m moving my FTSE allshare out of HSBC and in to an ETF instrument. There’s the obvious choice – DB Xtrackers FTSE Allshare (0.4% TER), but I’ve come across State Street for 0.3%, ticker FTAL. Anyone got an opinion on these guys. I’ve never heard of them.

  • 10 The Accumulator June 22, 2013, 6:40 am

    Hi Compounder, State Street are the creators of the first US ETF – SPDR – back in 1993. I wouldn’t have any problem using them.

  • 11 Dan April 21, 2014, 12:04 pm

    Thanks to The Investor & The Accumulator for a such a great resource.
    I’m tying myself in knots researching BlackRock index funds because of so many different classes – I need help! I’d like to collate figures for each clean class fund to make it as transferable as possible (I expect to have to move brokers more often than funds over the next 20-30 years!). I know from reading Monevator that A class is old-style and D class is clean but what about H, L & X available to buy for the EM tracker on III? H class is on HL so I assume it’s super clean.
    BlackRock own charges state OCF of 0.27% for the EM tracker D & L:
    http://www.blackrock.co.uk/individual/literature/fund-update/blackrock-authorise-unit-trusts.pdf
    On III the TER is 0.26% for D class, on Morningstar the TER if 0.28% for D & L class, and on your low cost list the OCF is 0.29%. Arghhhh!
    What I really want to know is how do you do your research for the low-cost article?
    Another annoyance is that the IMA fund directory (the only one I know of with an index criteria) doesn’t include Vanguard, even the UK domiciled funds.
    I dread to think what pain is in store when I get to ETFs!

  • 12 The Accumulator April 21, 2014, 6:35 pm

    Hi Dan,

    I understand your pain but it does get easier. Essentially you can dismiss everything that isn’t D class. iii often show things that you can’t buy because they suck in their data from someone like MorningStar which is comprehensive but doesn’t necessarily reflect the funds you can get from your broker. D & A class are the only classes commonly available to retail investors like you and me, and obviously we’re better off with D class. I avoid Super Clean exclusive classes because once you add up the fund cost and the platform cost then you can usually get a better deal with a more competitive broker and the regular fund. Moreover, if you wanted to transfer to another broker it’s unlikely you’ll be able to take H funds with you.

    TER/OCFs are inconsistent from place to place because sites update at different rates. I always assume the most informed source is the fund provider. The IMA fund directory tends to lag to a ridiculous degree, but the Youinvest and TD Direct fund screeners now have passive filters. They’re not necessarily whole of the market but they’re pretty close.

    Here are my two favourite sources for ETFs:

    https://www.whichetf.co.uk/etp-table/
    https://www.justetf.com/uk/index.html

    Thank you for your kind comments about the site. Do persevere, after a while experience will speed things up for you.

  • 13 Dan April 21, 2014, 8:11 pm

    Thanks TA, especially for the tips on research, together with your site it does indeed give me the motivation to persevere through the fog that is the financial services industry (I’m not sure why I expected anything different!). I guess that’s why passive investors flock to Vanguard and their entry into the UK market has been a breath of fresh air. Of course diversification not only applies to markets but providers and brokers too.

    I find trustnet useful in that it lists the other classes available although I find the simple text search limited (e.g. searching for “BlackRock Emerging” lists their actively managed fund but not the tracker because it’s titled “BlackRock CIF Emerging….”).

    Another useful resource is http://www.ftse.com/analytics/factsheets for trying to understand constituents/allocations of various similarly named indices.

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