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How to find index funds

Posted By The Accumulator On In Passive investing | Comments Disabled

Buying index trackers [1]

Trust no-one: That’s my motto when searching for index trackers [12]. Most fund comparison sites are either riddled with errors or feel like an exercise in mental cruelty. And with passive investing [13] being the itchy boil on the cheeks of the investment industry, perhaps it’s no surprise they don’t rush to tell you how to find index funds.

In fact, I’ve yet to discover a one-stop ‘Trackers-R-Us’ experience that delivers a pain-free, passive-product picking experience.

But I can outline my fund-screening strategy that combines the best sites so you can systematically:

Find the right index fund in three steps [14]

How to find index funds

First decide which asset class [15] you want to track, then use the following method to find a suitable index fund.

Stage one: Morningstar

Morningstar is a renowned source of investment fund data, and its fund screener is relatively user-friendly and up-to-date.

Fire up the fund screener [16]

There are plenty of filters to play with, but as passive investors we only need a few.

Apply filters to fish for funds [17]

Let’s assume I want to find index funds for the emerging markets. I apply the following filters:

Broad Category – set to Equity.

Morningstar Category – use to select your asset class e.g. Global Emerging Markets Equity.

Tip: Use the Morningstar Category to pick an asset class but ignore the IMA Sector filter. Morningstar is far more conscientious about accurately labeling funds according to its own classification versus the IMA’s. For instance, searching under the IMA Sector’s Global Emerging Markets tag means you’ll miss out on Vanguard’s emerging markets index fund [18].

Investor Type – set to non-institutional.

Max Total Expense Ratio – set to 1% for emerging markets (for most asset classes I’d set the TER [19] around 0.5%). We want to rule out as many of those expensive active funds as possible.

Max Initial Sales Charge – leave it set to ‘Any’. Bizarrely, if you go for 0.5% (the lowest setting) then the screener knocks out all the funds Morningstar hasn’t inputted an initial charge for – including all the index funds!

Like me, you may spend some time searching wistfully for a tracker-only filter. It doesn’t exist.

Some Morningstar quirks to beware of

Next hit ‘search’ and behold your shortlist. It will be a jumble of active funds, index funds and institutional funds (that non-institutional filter is more of a novelty button).

Unfortunately, unreliable data-entry makes these Morningstar results useful as a rough guide only. But first things first: let’s put ’em in an order that makes sense for passive investors i.e. we want the cut-price funds [20] at the top of our list.

Hit the Fees and Details tab, then press the TER hyperlink a couple of times until the cheapest funds rank at the top.

Now you’ll be confronted with all kinds of juicy sights.

For example, Aberdeen Emerging Markets looks amazing value – TER 0.22% and no initial charge. But a quick look at the factsheet reveals this to be a Morningstar mirage. The real TER is an eye-watering 1.88% with a 4.25% initial charge.

Morningstar’s erratic TER rankings mean there’s no easy way to spot the index funds. The best method is to scan your shortlist for funds with the word index in the name e.g. L&G Global Emerging Markets Index [21] or Vanguard Emerging Markets Stock Index.

Disregard the Min Initial Purchase information, too. It’s often wrong. Vanguard index funds [22] are quoted as requiring an initial purchase of £100,000, but this is only true for investors buying directly from Vanguard. In reality, you can buy these funds from retail platforms from £50.

So if you can’t trust the basic information, what’s the point of using the service?

Well, Morningstar is good for a snapshot of the market. You can be reasonably sure that it’ll list every index fund out there. The trick is picking them out of the murk and not wasting time chasing hot leads that turn into dead ends.

Morningstar also offers a fund quick rank tool [23] that some might find easier to use.

Stage two: The Investment Management Association (IMA)

The IMA screener is the one fund fishing site [24] that lets you filter for trackers. It’s beautifully simple:

There are other filters, but as a rule with screeners, the fewer boxes you tick, the less chance your search will miss something important.

I prefer to start with as wide a sweep of the market as possible, and then narrow my focus onto the most promising candidates. Use the tracker filter and the IMA will only dish up index funds. There aren’t very many [25] – but that’s the UK for you.

It doesn’t help that the IMA’s screener ignores Vanguard funds. It also tends to be a little out of date, lagging behind fund launches and current TER info.

But it does score highly for ease-of-use. It’s also a useful mopping up exercise after Morningstar – a reassurance that you haven’t missed anything. And it provides a quick guide to the firms that are serious about index funds, so you know who to keep an eye on in the future.

Stage three: The product provider

With a shortlist picked from Morningstar and the IMA, it’s time to dig a little deeper.

As we’ve seen, fund-finder’s data should be treated with caution, so the final stop is the product provider’s website. From there, you can bone up on the fund using the available literature to make sure it’s as good as it looks.

Alternative ways to find index funds

Trustnet [26] is a good alternative to Morningstar. I personally prefer Morningstar because Trustnet’s screener doesn’t rank by TER.

The FT’s fund screener [27] is nice and pink, but also obtuse and slow. It filters by annual management charge (AMC) rather than TER, which is pointless as TER is the truer measure of price. The FT’s service is also less timely and data rich than Morningstar’s.

With practice, you’ll be able to use the Morningstar and IMA screeners to sweep asset classes for index funds within minutes.

ETF exploration is a different bag of bananas. I’ll delve into that next time.

Take it steady,

The Accumulator

P.S. Do you have any special insights into how to find index funds? Please let us know in the comments below.

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