Compare funds: what to look for

How do you compare funds from a long list of me-too products? How do you factor in past performance, given that it tells you little about future results?

In this post I’ll outline the process that powers my passive investing strategy.

Best of all, it is centred on a freely available fund comparison tool.

Compare funds from a shortlist

First, narrow down your prospects to a select band of candidates by using:

• Monevator’s cheapest index trackers page
• Morningstar’s fund screener
• JustETF’s ETF screener

Start with the cheapest funds you can find. Judge them by Ongoing Charge Figure (OCF) or Total Expense Ratio (TER).

Then pick some investments with a ten-year track record – or the longest you can find. This will help you benchmark the fund comparison to come.

We advise limiting your comparison to tracker investments, such as index funds and ETFs.

Passive investing explainer
Index trackers are key pillars of a passive investing strategy.
We believe a passive investing strategy is right for the vast majority of investors because:
– The vast majority of people have no investing edge.
– Past performance tells you little about an investment’s future prospects.
– Investment costs heavily influence your results.
– Passive investing is backed by hard evidence.

Once you have your shortlist, you can use a charting tool to compare funds.

We’ll use past performance data – not to predict the future – but to check that these funds actually do what they say they do.

This stage helps comb out weak or misidentified funds.

It also enables us to see if the cheapest funds by OCF / TER really do offer value for money.

Compare funds using a charting tool

The best publicly available tool I’ve found is Trustnet’s Multi-plot Charting tool.

It lets you perform a like-for-like fund and ETF comparison on up to ten year’s worth of data.

To add the funds on your shortlist to the table, go to the top-right Add to this chart dropdowns.

The Investment Type dropdown enables you to select Exchange Traded Funds (ETFs), funds, Investment Trusts, and shares.

Select the IA Unit Trusts & OEICs category to find most index funds.

You’ll often find obscure workplace pension funds in the Pension Funds and Offshore Funds categories.

Find the bulk of your funds by trawling through the list in the Sector dropdown.

Do your spear-fishing for specific funds in the Management Group dropdown.

Fund comparison hacks

Like most fund comparison tools, you need to know how to get the most out of Trustnet’s database.

You can easily dial-up a meaningless comparison by mistake.

I’ll show you how to use the tool by way of a Developed World index tracker face-off.

Accurate fund / ETF identification

Ensuring you’ve got the right fund is half the battle.

Identifying the correct product is crucial. It enables you to distinguish between the most competitive investment on the market and a similarly-named legacy fund with bloated fees.

The line-up of Lyxor MSCI World ETFs below highlights some of the issues inherent in browsing lists of investment products.

Source: Trustnet Chart tool. MSCI World refers to the index.

Fit for Brits

Problem: Not every fund listed is available to UK investors via UK brokers.

Solution: Make sure you choose the UK-facing branch of the fund provider. Find this under Trustnet’s Management Group Dropdown.

For example, the Lyxor MSCI World (LUX) UCITS ETF D is not available on the London Stock Exchange. Rather, it’s listed under the Lyxor Fund Solutions SA Management Group. This division caters to German and Luxembourgian investors.

UK investors can find Lyxor’s London Stock Exchange ETFs under the Lyxor Exchange Traded Funds Management Group.

Similarly, UK-relevant Vanguard ETFs are found under Vanguard Ireland and not Vanguard.

Naming shame

Problem: Trustnet misnames some funds.

Solution: Compare the name carefully with the version you want on the fund provider’s website. If you don’t get an exact match then click the fund name on Trustnet’s tool to find its dedicated page.

Here you may find Trustnet has labelled it correctly or discover other clues such as the OCF or inception date (labelled ‘Fund Launch’ on Trustnet).

These details enable you to deduce whether this is the same product you can see on the fund provider’s website. For example:

• The Lyxor UCITS ETF MSCI World GBP is not on Lyxor’s website.
• However, Trustnet lists the fund as the Lyxor MSCI World UCITS ETF – Dist on its dedicated page.
• That ETF is on Lyxor but it’s an expensive legacy effort.

This product has an uncompetitive 0.3% OCF. And it’s a synthetic ETF, which gives some people the willies.

It’s also domiciled in France. France levies higher rates of withholding tax than Ireland or Luxembourg-based funds.

The Lyxor Developed World ETF we want on our shortlist is the Lyxor Core MSCI World (DR) UCITS ETF USD.

It’s got a low 0.12% OCF, is a physical ETF, and boasts a tax-ducking Luxembourg residence.

Short changed

Problem: This ETF lacks a long-term track record.

Solution: Find a proxy that enables us to assess Lyxor’s management process over a longer period.

The table shows that Lyxor’s UCITS ETF MSCI World GBP tracked the MSCI World index1 very well over ten years.

It only trailed by 0.1% annualised, which is less than its OCF.

That’s a sign of a well-run fund. Consequently, I don’t have any concerns about the management behind the more youthful Lyxor Core MSCI World.

You can also see that the younger ETF beat its older sibling by 0.2% annualised over three years. That’s in line with the performance differential you’d expect from a fund costing 0.12% versus one that charges 0.3%. Fees cost you return!

• It’s much easier to compare index trackers when you know how to decode fund names.

Currency classes

It can be hard to wrap your head around the fact that a fund’s currency makes no difference. (That’s assuming you’re comparing two versions of the same fund).

But see below the returns of the GBP and USD version of the iShares Core MSCI World ETF:

The returns are identical across all time periods. The GBP fund is no less susceptible to foreign exchange fluctuations than the USD version.

This piece on currency risk explains why.

Note, the GBP hedged version of the fund delivers very different results. That’s because the hedge largely eliminates currency moves from the picture.

However, you can sometimes reveal a longer time-series of returns by changing the fund currency. This works when, say, the USD version of a fund predated its GBP twin by several years.

Otherwise, divergent currency class returns indicate you’re looking at different funds with similar names.

Income treatment

Accumulating funds should score the same returns as their income equivalents because Trustnet’s tool defaults to reinvesting income.

Outcomes will differ if the funds aren’t mirror images.

That’s ably demonstrated by these two iShares MSCI World ETFs:

• iShares MSCI World ETF Inc is the expensive legacy fund, OCF 0.5%.
• iShares Core MSCI World ETF Acc is the 0.2% hot take for the price-conscious.

It’s the ‘Core’ branding that reveals these funds are qualitatively different, not the Acc and Inc designations.

All things being equal, there is no return advantage to choosing an accumulating vs income fund – providing they’re spin-offs from the same master fund.

The impact of the index

Any index tracker worth its salt should match the returns of its index minus fund costs. (Index returns aren’t dragged down by costs.)

You can often uncover the index return on Trustnet if you know the following ‘cheat code’.

Every time you add an index tracker from the Add to this chart dropdown, tick the Add sector box under the dropdowns and hit the Add button.

You’ll get a message about how passive trackers load indices not sectors. Press OK and the index now graces your table. Assuming it’s available.

I’ve added the MSCI World and FTSE Developed World indices to the comparison below by using this method:

Trustnet also has an Indices category under the Investment Type dropdown. But you can dig up many more benchmarks using the hack above.

What’s in an index?

It’s hard to know which version of the index Trustnet presents. But we’ll mostly have to let that slide.

To briefly explain the main differences:

• The price return version of an index does not account for dividends and interest. It only tracks the changes in the prices of the index’s constituents.
• A total return (TR) index includes the impact of reinvested dividends and interest.
• The net total return version of an index (TRN) includes reinvested dividends and interest after the deduction of withholding tax.

Most indices are published in multiple formats. But the data is often kept under lock and key.

Indices shown by the likes of Yahoo and Google Finance are typically the price return version.

You shouldn’t benchmark against a price return index – it’s missing a huge part of the returns story. Specifically, dividends and bond coupons.

Most index trackers benchmark against a net total return index.

That helps massage their results because fund providers don’t usually pay the full withholding tax whack that’s deducted from net total return index results.

Withholding tax workarounds and securities lending revenue are two ways that trackers can post returns that match or beat their index, despite costs.

Separately, Trustnet’s data suggests that the MSCI World index has performed slightly better than its FTSE Developed World rival over a decade.

It’d be worth delving into why. (Famously, the FTSE index includes South Korea whereas the MSCI World does not.)

Compare funds: putting it all together

Here’s my short (ish) list of MSCI World hopefuls put together using the fund comparison process outlined above:

Click the little arrow next to the 10y time frame in the table’s sub-menu. That orders the field by 10-year returns.

Developed World ETFs are listed under the Equity – International category on Trustnet’s Sector dropdown for ETFs.

One index fund2 also made the grade: Fidelity’s Index World P – listed under IA Unit Trusts & OEICs in the Investment Type dropdown.

Comparing the contenders

The Amundi Prime Global ETF is the cheapest fund available. However I’d rather choose a product with a longer track record. One year’s worth of data tells you nothing. Even three years tells you next to nothing.

I struck out L&G Global Equity and the SPDR ETF for the same new-kid reason.

The Lyxor Core MSCI World only costs 0.12%. It can point to okay three year returns.

Casting around for some insight into Lyxor’s management process, we can see that its longer-toothed cuz, Lyxor UCITS ETF MSCI World, lags the decennial funds by iShares and HSBC.

That implies HSBC’s and iShares’ management process is a little more cost efficient.

HSBC’s MSCI World ETF has delivered excellent results over each time frame. It is reasonably priced at 0.15% OCF.

But the HSBC ETF also appears to beat its index regularly. I’d want to understand how closely the ETF’s holdings actually track the MSCI World.

Perhaps HSBC’s index sampling is less faithful than the other funds? In which case I’d have zero faith that advantage would persist.

Or it could be that HSBC brings in more securities lending revenue than rivals, or that it shares the profits more equitably with its investors.

Sounds great – but securities lending incurs counter-party risk.

Perhaps HSBC’s global banking operation is better at swerving withholding tax?

I’d research these issues further if this fund pick is to be a mainstay of my portfolio.

If I was a new investor – restricting myself to index funds – then I’d choose Fidelity Index World P.

This tracker’s five-year returns are excellent, and its OCF is a competitive 0.12%.

Beware of bugs

Note, there can be puzzling discrepancies in Trustnet’s data.

You should compare Trustnet’s numbers versus the fund provider’s dedicated webpage to double-check.

Fund provider’s performance data is often stale. So make sure the dates used on both sites are reasonably close to ensure a meaningful comparison.

Also, flip to Trustnet’s cumulative performance table to see what difference annualised returns make over time.

You may well decide that switching funds is not worth the hassle.

Final checks

I make a few more checks when I compare funds and ETFs. This piece on how to choose index trackers runs you through the list.

I don’t blame you for thinking that this comparing fund malarky looks quite daunting.

However, consider two things:

• Like any process, you can do it incredibly quickly after a bit of practice.

• Picking the right fund upfront typically means you can hold it for the next five to ten years knowing that it’s competitive enough.

Take it steady,

The Accumulator

Bonus appendix

These pieces can help with your further research:

• How to read a fund factsheet.
• How to read a bond fund webpage.
• Our best global tracker fund (equity) picks.
• Find the best bond funds.
• Ideas for the cheapest index trackers.

1. The first entry in the chart is the MSCI World index, although Trustnet doesn’t reveal which version it is. [↩]
2. As opposed to index tracking ETF. [↩]