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How to buy your first index trackers

There’s a gap. A gap that exists between the last page of the investing advice books and buying your first index tracker fund.

Where are these fabled funds that lead to passive investing nirvana? How do you pull the trigger? “Just tell me how to buy index trackers, would you?!”

Your wish, dear reader…

I’m assuming you’ve done your research, decided upon your goals, your asset allocation, and the dollop of regular contributions you’ll make towards your masterplan. You’ve opted for the DIY investing route, and the only thing left to do is execute.

I’m also assuming you’re a passive investor who wants to stick primarily to simple index funds and Exchange Traded Funds (ETFs). Because that’s my tribe.

Where to buy index trackers

Buy online. Human contact only ratchets up expense and could leave you in the hands of some slippery smoothie with a script – a script designed to fatten their bank account, rather than yours.

Choose the cheapest online broker (also known as a platform) you can find. Our broker comparison table will help you pick out the right one.

How to buy your first index tracker

Don’t go directly to the fund provider, don’t use a full-service, ‘advice’ dispensing stockbroker, and definitely don’t walk into your local bank with a bag full of used tenners.

The best brokers offer the DIY investor:

  • The cheapest method of buying, selling and holding funds.
  • A wide choice of funds from different providers that you can mix and match.
  • Tax shields for your funds – stocks & shares ISAs and SIPPs.
  • A regular investment scheme to automate drip-feeding.
  • Online portfolio tools to track your investments.
  • Fund search facilities.
  • Easy access to your funds and paperwork.
  • An execution-only service – so no advice on purchases.

There’s little practical difference between the various offerings. Hargreaves Lansdown are the one broker that most people have actually heard of but they’re expensive. They score well for customer service but you will pay a premium for it.

I’ve personally experienced four cheaper brokers and never had a problem with the customer service.

The most important thing to be aware of is you’re choosing an execution-only service. You pay low fees because you’re not getting any advice.

Also, your first choice investing platform may not carry the products you want. Always check using the site’s search tool before signing up and transferring money.

Key decision

One of the most important decisions you will make is whether you will pay your broker a flat-rate or percentage fee for their services.

A percentage fee is best for small investors who are likely to have less than £30,000 in assets because that will work out cheaper than the most competitive flat rate charge on the market.

A flat-rate fee is cheapest for investors who are heading north of that £30,000 fee mark. At this point percentage fees slice off more from your assets than the keenest flat rates out there.

You can calculate your own situation here. Most brokers have chosen either a flat rate or percentage fee charging scheme and our broker comparison table has split them along those lines.

Take it steady,

The Accumulator

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{ 68 comments… add one }
  • 51 British Engineer June 25, 2014, 11:07 am

    Absolutely agree with TileStilt & Ben, this is a fantastic website for picking out important information in a short time period. Always good comment threads and I’m sure us ‘lurkers’ get as much value as the active participants.

    I haven’t heard many opinions on the Fidelity platform. I’ve picked out some great active funds (good luck/rising share index?) but I’m moving towards investing in trackers. I believe Fidelity charge 0.35%+(0.07% to 0.23%) which sounds like it’s double the ‘best’ rates.

  • 52 JAL June 25, 2014, 3:35 pm

    Although it’s a tad off-topic, it’s interesting to hear your comments about CSD, Nyul. I’m currently an index-trackers-only man and haven’t dealt in individual shares (UK or non-UK) so I don’t know what the other platforms do regarding that (and currently it doesn’t affect me), but it is interesting how even if you think you’ve read “everything” about a platform’s fees.. you still probably don’t know “everything” you need to know!

  • 53 Nyul June 25, 2014, 3:49 pm

    I’ve been buying VWRL which is an ETF, so the stock commission pricing applies. If you look at the CSD pricing page, there’s a link you can click to see the “Telephone” dealing prices, and under there it mentions the £30 per line per annum charge for holding non-UK assets. They also wanted to hit me for transferring IN my ISA (per line!) on top of me being charged by IWEB on the way OUT.

    https://www.charles-stanley-direct.co.uk/What_We_Charge
    https://www.charles-stanley-direct.co.uk/Products_And_Services/Telephone_Dealing_Team

    CSD have made me appreciate the benefits of IWEB’s simpler pricing. CSD blew it with me. I have some stock in there but I’ll be transferring it out I think as I hate dealing with companies that maintain opaque pricing – it’s bordering on dishonest.

  • 54 Oliver June 25, 2014, 11:44 pm

    Good article and starting point.
    At the moment my small investment (although it is about half what I have in a cash ISA) is with nutmeg but going alone seems like a better idea in the long run.
    Paying a relatively high fee proportionally, but when I consider that the difference is what I might spend on an evening out I’m not in any rush so still researching. I think next financial year I will do some DIY ISA investing, then perhaps transfer over nutmeg fund/allowance.
    The platform fees are rather confusing and off-putting, they would benefit from simpler pricing for small-time investors

  • 55 Matt DB June 26, 2014, 5:09 am

    Apologies if this has been answered elsewhere, but where is the best place to hold USD ETFs? I am returning to the UK after a 5 year expat, and want to invest USD in the UK (I could convert to GBP which would be simpler, but I don’t want to lockin a 1.7 rate, I’m hopeful it will move back in my favour).

    I have Vanguard FTSE tracker at the moment which I think I will move to iWeb where I will just hold it. They charge 1.5% on purchase and sale of stock for USD though as they have to convert to GBP and are not allowed to hold USD – seems very steep. I would like to buy and hold Vanguard S&P UCITS ETF (VUSD.L). Looks like TD allow you to hold and buy in USD but charge .3% up to £250k and .2% thereafter, whereas HL charge .45%. Are there any better options to invest in USD from the UK? Many thanks!

  • 56 One Day June 26, 2014, 3:55 pm

    Just having a look at investing in Index funds through my pension provider as opposed to the active funds I’m in and wondering if I have this right.

    Take for instance “SL Vanguard FTSE Developed Europe ex UK Equity Index Pension Fund”, they have this marked as FMC 1% – .75% scheme rebate which is nice, but then the “advisors” take .25% on top of that making it .50% (+.02 expenses?)

    If I was to move 100k to Interactive Investors SIPP and plonk it all in the same fund “Vanguard FTSE Developed Europe ex UK Equity Index Acc” (they are the same yes?) for instance the FMC = .25% plus the 144 fee on the 100k being .14% = .39% total.

    Would that be right or am I missing something? Would only be a difference of 110 a year so not sure it’s worth moving it. The discounts seem good on active funds just not trackers that have their FMC increased to begin with 😐

  • 57 The Accumulator June 26, 2014, 6:38 pm

    @ Matt – Google the International Investor. That’s an excellent site for guidance on holding foreign ETFs. When I looked into this about a year ago, I was going to plump for Youinvest. They put up their currency charges though and I didn’t go for US ETFs in the end, so I’m not sure how competitive they are now.

    @ Paul W – thanks for being my spell-checker 😉

    @ One Day – here’s a calc that will help you see how much a small difference can make over time. At least then you can take a long term view on whether a move is worth it: http://www.trueandfaircalculator.com/calculators?type=standard&refer=index

  • 58 One Day June 26, 2014, 8:58 pm

    Thats a nice one for direct comparison thanks. It does add up over the next 25 years I have to go so it makes sense to move that pot, I’d also have a slightly better tracker choice in the SIPP.

    The calculator is rather scary when I put in the current active fund charges and assume they don’t outperform…

  • 59 Paul W June 26, 2014, 11:08 pm

    @TA – an easy mistake to make, but if flate doesn’t mean anything, your more reliable spell-checker should underline it in red. Mine does 😉

  • 60 Paul W June 26, 2014, 11:43 pm

    And thank you for your great job. I should have somehow told you in person, but anyway you’ve got my huge respect and gratitude.

  • 61 Will June 27, 2014, 12:58 am

    I LOVE the bit about avoiding real humans for this sort of thing. I agree, the costs just go up and up. Sometimes has to pay them! The fact is, the internet will be able to tell a person more about how to invest than any investment salesperson (oops, I meant adviser) could ever tell them.

    I use Vanguard exclusively. But of course, who doesn’t??

  • 62 ivanopinion June 28, 2014, 12:48 pm

    @Nyul

    “… I read Winning the Loser’s Game by Charles Ellis recently and was intrigued that he suggested more people consider avoiding bonds, and focus on a long term 100% equities portfolio.”

    There was an article a few weeks ago about how much you can safely withdraw from an retirement investment pot each year (safe withdrawal rate or SWR). This referenced some studies which showed how resilient different mixes of equities and bonds have been, depending on the year of retirement. This shows that a small portion of bonds does reduce long term risk, but heavy dollops of bonds are worse than 100% equities.

    See http://www.bogleheads.org/wiki/File:TrinityTable3.jpg. With 100% equity and a 4% withdrawal rate each year, 95% of retirement years between 1926 and 1995 would have sustained that withdrawal rate for 30 years. With 25% bonds, the success rate increased to 98%. (Success defined as not running out of money for 30 years.)

    With 50% bonds, the success rate falls back to 95%, same as 100% equities. But with 75% bonds, a 4% withdrawal rate would have failed for 29% of retirement years. With 100% bonds, the failure rate goes up to 80% of retirement years. Even a 3% withdrawal rate would have been too high to last 30 years in 20% of retirement years.

    Interestingly, if you use a 5% withdrawal rate instead, 100% equities had the highest success rate.

    This particular study was for the US markets, but I suspect the broad conclusion would be the same for a global spread.

  • 63 Nyul June 29, 2014, 2:25 pm

    Thanks ivanopinion, that’s a fascinating table. It’s reassuring to see that if things got hairy, dropping to a 3% withdrawal rate has a significant impact.

    I’m still undecided on bonds. 100% equities will probably give a better return over the very long term, but that ride will clearly be agonising at times. I think 10-20% bonds is probably sensible for me, to smooth the volatility a bit, and being able to rebalance from bonds to equities when the latter collapse in value might take a tiny bit of the sting out of it.

  • 64 ivanopinion June 29, 2014, 2:37 pm

    I can’t bring myself to invest in bonds explicitly, particularly not at the moment, with a huge price drop inevitable at some point, once interest rates go back to “normal”.

    My compromise is that I do invest a reasonable chunk of my portfolio in certain funds aiming for lower risk than 100% equity funds. eg, SLI GARS, Troy Trojan. These have holdings of a variety of things, including bonds, commodities, as well as equities. So elements of the fund portfolios should have quite low correlation with equities, giving the same sort of smoothing effect. I’m sure purists would scoff that it’s not the same, however.

  • 65 The Accumulator June 29, 2014, 6:08 pm

    @ Nyul – you’re right, one of the major uses of bonds is to keep investors in the game when the going gets tough – they’re an anti-panic device. Here’s a piece on research that offers a more nuanced view on bond allocations over an investors lifetime: http://monevator.com/buy-shares-in-retirement/

  • 66 Nyul June 29, 2014, 9:06 pm

    @Accumulator, that’s a great piece, thanks for the pointer. Bonds have their advantages but as others have said the low interest rate environment raises their risks and probably their returns a bit higher. We’ll all find out who’s right in a few decades!

  • 67 former player December 2, 2015, 10:27 pm

    Does your advice not to go directly to the fund provider apply to Vanguard? If, for instance, one had the necessary cash to invest directly with them why would one go through a broker/financial adviser/online platform? What would be the advantage?

  • 68 The Accumulator December 3, 2015, 6:55 pm

    The problem with going directly to a fund provider is if you find it locks you in to a limited choice of funds and prevents you from diversifying across institutions as well as asset classes.

    http://monevator.com/assume-every-investment-can-fail-you/
    http://monevator.com/investor-compensation-scheme/

    The advantage of going direct is if it eliminates some level of cost or enables you to access a level of service such as avoiding this:
    http://monevator.com/nominee-accounts/

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