The uproar over the new Hargreaves Lansdown fees [1] imposed on index trackers has brought into focus a relatively obscure tracker fund family that potentially offers a fee-dodging workaround.
A number of Monevator readers have alighted on the BlackRock Collective Investment Funds (CIFs) as a cheaper alternative for passive investors [2] who want to stay with Hargreaves Lansdown but who are being punished by flat-rate fees on small portfolios.
The BlackRock CIF index trackers [3] are free of Hargreaves Lansdown’s platform fees. And as they supply two to three times the commission paid by HSBC index funds, things might just stay that way for the foreseeable.
[4]
The workaround
The smaller your fund holdings the more likely it is that the BlackRock index trackers will work out more cheaply for you. Here’s the logic:
HSBC FTSE All-Share Index fund TER [5] = 0.27%
Platform fee = £24 per year
BlackRock UK Equity Tracker Class A TER = 0.57%
Platform fee = £0
The HSBC fund has the cheaper TER but its platform fee means the breakeven point for annual costs between the two funds is £8,000.
X% + 0.27% = 0.57% (i.e. the same TER as the Blackrock Tracker fund)
Therefore X% = 0.3%
Platform fee is £24 a year, so breakeven fund size is…
£24/0.3% = £8,000
Which all goes to show that if your HSBC FTSE All-Share fund is worth less than £8,000 then you’ll pay an annual cost that’s higher than the 0.57% burden of the equivalent BlackRock fund.
Not so fast
Of course, it’s not so simple. Not by a long chalk, my friends. There’s an additional cost to pay every time you trade the BlackRock tracker funds in the shape of the bid-offer spread [6].
Just like with foreign currency, you pay a higher price to buy the funds and get a lower price if you sell them, while a grinning middleman pockets the difference.
As I write, the spread for the BlackRock UK Equity Tracker Class A fund is a yawning 5.57%! Normally, if you buy a fund for 5.57% more than you can sell it, then you are instantly down 5.57% on the deal.
But happily this isn’t yet another case of legalised banditry by the financial services industry: the situation is not as bad as it seems.
BlackRock tracker funds are subject to an initial charge of 5% and this shows up in the buying price as the main chunk of the spread.
Now, an initial charge is the kind of legalised banditry that passive investors should never stump up for – but Hargreaves Lansdown kindly rebates the whole 5% on the BlackRock funds.
The remaining 0.57% spread is still a pretty fat one to pay though. It’s the kind of bid-offer gulf I’d expect from an emerging market ETF rather than a UK equity fund.
Does the spread put the kybosh on a switch to BlackRock tracker funds? It depends on:
- How often you trade
- The size of the spread for that fund when you trade (it might be less than 0.57% that day)
BlackRock have published estimated spreads for their CIF tracker funds on page 10 of the simplified prospectus [3]. Look for the A Class funds.
You can calculate how the spread affects your own situation by using a fund cost comparison calculator [7]. Input the spread as an initial charge (leaving out the discounted 5% portion).
Between a BlackRock and a hard place
Even if the calculations swing in favour of a move, make sure you do your research [8]. Especially look out for:
- Which index your new fund tracks. The BlackRock tracker funds aren’t necessarily following the same index as your existing funds.
- How well does each fund track the index? Tracking difference [9]could easily wipe out the sliver of costs you save by switching.
The BlackRock tracker funds certainly open up new possibilities for UK passive investors but they’ve got more wrinkles than an elephant’s leg. Go here [10] for a Monevator botox injection.
Take it steady,
The Accumulator