Picking an index tracker out of the investing swamp

You want to invest in an index tracker ^[12], 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 ^[13] taking your first steps in this environment, you don’t need a tracker – you need a map.

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Waypoint 1 – Searching for an index tracker

Many investors select funds using the search tools of their broker ^[2]. I prefer to use an independent fund-screener like Morningstar ^[15], 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:

• Index funds ^[8]
• ETFs ^[9]

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) ^[16] – 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 ^[17] 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 ^[3] 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 ^[18], 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 ^[19], fees, performance, holdings and so on.

You can also quickly compare similar funds with Morningstar’s handy Fund Compare tool ^[20] – 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 ^[21].

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 ^[22] (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 ^[23] 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 ^[24]. It’s a good short-cut to a shortlist.

Take it steady,

The Accumulator

Series Navigation

Choosing an investment platform: A nuts and bolts guide ^[3]How to choose the best index trackers #1: Basics ^[4]