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Low-cost index funds UK

Low-cost index funds will help you save money

This is our list of low-cost index funds and ETFs that’s kept updated to enable investors to find the cheapest index trackers available in the UK.

You can select from these funds to build a diversified portfolio that, as part of a passive investing strategy, will help you achieve your investing objectives. 

We focus on value and cost in this list because crushing charges is a core component of wise investing. Every pound you save in fees is a pound that snowballs over the years and speeds you towards your financial goals.

Our piece on management fees explains how even small savings add up to a big difference.

The growing recognition of the importance of investment fees has driven explosive growth in low-cost index funds and Exchange Traded Funds (ETFs) over the past 20 years.

These two types of index tracker are the best value investment vehicles available in the UK and the right choice for passive investors.

Low-cost index funds UK – the Total Cost of Ownership

Our cheapest tracker fund UK list is divided into the key sub-asset classes you may wish to invest in.

The picks per asset class are ranked by their Total Cost of Ownership (TCO).

The TCO is the sum of a fund’s transaction costs and its Ongoing Charge Figure (OCF).

Many outlets will only reveal a fund’s OCF (or Total Expense Ratio) but that misses out a significant chunk of cost embodied by its less well publicised transaction cost figure. 

Transaction costs are the fees and taxes that all investment funds inevitably incur when trading their underlying assets.

We think it’s important to include transaction costs when considering your shortlist because these charges can rival the OCF in particular sub-asset classes. 

Note: fund costs are a complex and confusing area so we’ve got a few more notes about fees after the main list below. 

In the meantime, let’s go grab some bargains!

UK large cap equity

Cheapest

  • Vanguard FTSE UK All Share Index Unit Trust (GB00B3X7QG63) TCO 0.06% (OCF 0.06%, Transaction 0%)

Next best

  • HSBC FTSE All Share Index Fund Institutional (GB0030334345) TCO 0.07% (OCF 0.02%, Transaction 0.05%)
  • Lyxor Core UK Equity All Cap ETF (LCUK) TCO 0.1% (OCF 0.04%, Transaction 0.06%)
  • Fidelity Index UK Fund P (GB00BJS8SF95) TCO 0.1% (OCF 0.06%, Transaction 0.04%)
  • L&G UK Equity ETF (LGUK) TCO 0.12% (OCF 0.05%, Transaction 0.07%)

The L&G ETF has an ESG remit.

UK mid cap equity

Cheapest

  • Amundi Prime UK Mid and Small Cap ETF (PRUK) TCO 0.05% (OCF 0.05%, Transaction 0%)

Next best

  • HSBC FTSE 250 Index Fund C (GB00B80QG052) TCO 0.19% (OCF 0.1%, Transaction 0.09%)
  • Vanguard FTSE 250 ETF (VMIG) TCO 0.22% (OCF 0.1%, Transaction 0.12%)
  • Xtrackers FTSE 250 ETF (XMCX) TCO 0.24% (OCF 0.16%, Transaction 0.08%)

The Amundi index tracker is streets ahead of its rivals due to Morningstar’s report of zero transaction costs. We’ve requested verification from Amundi. 

UK small cap equity

There are no good low-cost index funds available for the UK small cap asset class. The iShares ETF listed below is more an expensive FTSE 250 tracker. Our other suggestions are active funds and are shown as a selection of what’s available rather than a comprehensive survey.

Cheapest

  • Schroder Institutional UK Smaller Companies Fund (GB0007893984) TCO 0.53% (OCF 0.51%, Transaction 0.02%)

Next best

  • Baillie Gifford British Smaller Companies B Fund (GB0005931356) TCO 0.73% (OCF 0.73%, Transaction 0%)
  • L&G UK Smaller Companies Fund (GB00B7LFF300) TCO 0.79% (OCF 0.78%, Transaction 0.01%)

UK equity income

Cheapest

  • Vanguard FTSE UK Equity Income Index Fund (GB00B59G4H82) TCO 0.29% (OCF 0.14%, Transaction 0.15%)

Next best

  • WisdomTree UK Equity Income ETF (WUKD) TCO 0.35% (OCF 0.29%, Transaction 0.06%)
  • SPDR S&P UK Dividend Aristocrats ETF (UKDV) TCO 0.64% (OCF 0.3%, Transaction 0.34%)

Global equity – developed world and emerging markets (All-World)

Cheapest

  • HSBC FTSE All-World Index Fund C (GB00BMJJJF91) TCO 0.13% (OCF 0.13%, Transaction 0%)

Next best

  • iShares MSCI ACWI ETF (SSAC) TCO 0.20% (OCF 0.2%, Transaction 0%)
  • Fidelity Allocator World Fund W (GB00B9777B62) TCO 0.21% (OCF 0.2%, Transaction 0.01%)
  • Vanguard LifeStrategy 100% Equity Fund (GB00B41XG308) TCO 0.23%(OCF 0.22%, Transaction 0.01%)
  • Vanguard ESG Global All Cap ETF (V3AB) TCO 0.31% (OCF 0.24%, Transaction 0.07%)

Vanguard LifeStrategy and Fidelity Allocator invest in other index trackers. Fidelity invests in REITs and small caps.

World equity – developed world only

Cheapest

  • Amundi Prime Global ETF (PRWU) TCO 0.05% (OCF 0.05%, Transaction 0%)

Next best

  • L&G Global Equity ETF (LGGG) TCO 0.11% (OCF 0.1%, Transaction 0.01%)
  • Lyxor Core MSCI World ETF (LCWL) TCO 0.12% (OCF 0.12%, Transaction 0%)
  • SPDR MSCI World ETF (SWLD) TCO 0.13% (OCF 0.12%, Transaction 0.01%)
  • iShares Developed World Index Fund D (IE00BD0NCL49) TCO 0.12%(OCF 0.12%, Transaction 0%)
  • Fidelity Index World Fund P (GB00BJS8SJ34) TCO 0.12% (OCF 0.12%, Transaction 0%)

The L&G ETF has an ESG remit.  

World ex-UK equity

Cheapest

  • L&G International Index Trust I Fund (GB00B2Q6HW61) TCO 0.14% (OCF 0.13%, Transaction 0.01%)

Next best

  • Vanguard FTSE Dev World ex-UK Equity Index Fund (GB00B59G4Q73) TCO 0.15% (OCF 0.14%, Transaction 0.01%)
  • Aviva Investors International Index Tracking SC2 Fund (GB00B2NRNX53) TCO 0.25% (OCF 0.25%, Transaction 0%)

You can also pick ‘n’ mix using individual US, Europe ex-UK, Japan, and Pacific ex-Japan trackers.

World income equity

Cheapest

  • Vanguard FTSE All-World High Dividend Yield ETF (VHYG) TCO 0.37% (OCF 0.29%, Transaction 0.08%)

Next best

  • iShares MSCI World Quality Dividend ESG ETF (WQDA) TCO 0.38% (OCF 0.38%, Transaction 0%)
  • Fidelity Global Quality Income ETF (FGQD) TCO 0.43% (OCF 0.4%, Transaction 0.03%)
  • WisdomTree Global Quality Dividend Growth ETF (GGRG) TCO 0.43% (OCF 0.38%, Transaction 0.05%)
  • Vanguard Global Equity Income Fund (GB00BZ82ZW98) TCO 0.58% (OCF 0.48%, Transaction 0.1%)

The Vanguard fund is active but gives you a non-ETF option.

World small cap equity

Cheapest

  • UBS (Irl) ETF – MSCI World Small Cap Socially Responsible (WSCR) TCO 0.3% (OCF 0.23%, Transaction 0.07%)

Next best

  • Vanguard Global Small-Cap Index Fund (IE00B3X1NT05) TCO 0.34% (OCF 0.3%, Transaction 0.04%)
  • iShares MSCI World Small Cap ETF (WLDS) TCO 0.35% (OCF 0.35%, Transaction 0%)
  • SPDR MSCI World Small Cap ETF (WOSC) TCO 0.47% (OCF 0.45%, Transaction 0.02%)

Emerging markets equity

Cheapest

  • Amundi Prime Emerging Markets ETF (PRAM) TCO 0.1% (OCF 0.1%, Transaction 0%)

Next best

  • Lyxor MSCI Emerging Markets ETF (LEMA) TCO 0.17% (OCF 0.17%, Transaction 0%)
  • HSBC MSCI Emerging Markets Index ETF (HMEC) TCO 0.21% (OCF 0.15%, Transaction 0.06%)
  • Fidelity Index Emerging Markets Fund P (GB00BHZK8D21) TCO 0.21% (OCF 0.2%, Transaction 0.01%)
  • HSBC Emerging Market Sustainable Equity ETF (HSEF) TCO 0.29% (OCF 0.18%, Transaction 0.11%)

Multi-factor – Global

Cheapest

  • JPMorgan Global Equity Multi-Factor ETF (JPLG) TCO 0.22%(OCF 0.19%, Transaction 0.03%)

Next best

  • Invesco Quantitative Strategies ESG Global Equity Multi-Factor ETF (IQSA) TCO 0.3% (OCF 0.3%, Transaction 0%)
  • Invesco Global ex UK Enhanced Index Fund Y (GB00BZ8GWR50) TCO 0.34% (OCF 0.23%, Transaction 0.11%)
  • Franklin LibertyQ Global Equity SRI ETF (FLXG) TCO 0.4% (OCF 0.4%, Transaction 0%)
  • Amundi ETF Global Equity Multi Smart Allocation Scientific Beta ETF (SMRU) TCO 0.41% (OCF 0.4%, Transaction 0.01%)

All factor investing is effectively straying into active management territory. Essentially, you hope that your chosen subset of the market can outperform. The important thing is to choose products underpinned by sound financial theory, a verifiable set of rules, and a commitment to low costs.

Regional ETFs are available. But we’ve stuck to global multifactor products for broad diversification.

Property – UK

Cheapest

  • iShares UK Property ETF (IUKP) TCO 0.4% (OCF 0.4%, Transaction 0%)

Next best

  • iShares MSCI Target UK Real Estate ETF (UKRE) TCO 0.43% (OCF 0.4%, Transaction 0.03%)

No index fund alternative.

Property – global

Cheapest

  • iShares Global Property Securities Equity Index Fund D (GB00B5BFJG71) TCO 0.23% (OCF 0.17%, Transaction 0.06%)

Next best

  • Amundi ETF FTSE EPRA/NAREIT Global ETF (EPRA) TCO 0.24% (OCF 0.24%, Transaction 0%)
  • VanEck Global Real Estate ETF (TREG) TCO 0.26% (OCF 0.25%, Transaction 0.01%)
  • L&G Global Real Estate Dividend Index Fund I (GB00BYW7CN38) TCO 0.27% (OCF 0.22%, Transaction 0.05%)
  • Northern Trust Developed Real Estate ESG Index Fund (NL00150003F8) TCO 0.31% (OCF 0.28%, Transaction 0.03%)

There’s an unusual 1% exit fee on the Northern Trust fund. It’s also Dutch domiciled so watch out for withholding tax

All-commodities

Cheapest

  • L&G All Commodities ETF (BCOM) TCO 0.15% (OCF 0.15%, Transaction 0%)

Next best

  • iShares Diversified Commodity Swap ETF (COMM) TCO 0.26% (OCF 0.19%, Transaction 0.07%)
  • iShares Bloomberg Enhanced Roll Yield Commodity Swap ETF (ROLL) TCO 0.28% (OCF 0.28%, Transaction 0%)
  • WisdomTree Broad Commodities ETF (COMX) TCO 0.37% (OCF 0.29%, Transaction 0.08%)

Gold

Cheapest

  • Amundi Physical Gold ETC (GLDA) TCO 0.12% (OCF 0.12%, Transaction 0%)
  • Invesco Physical Gold A ETC (SGLP) TCO 0.12% (OCF 0.12%, Transaction 0%)
  • WisdomTree Core Physical Gold ETC (GLDW) TCO 0.12% (OCF 0.12%, Transaction 0%)
  • Xtrackers IE Physical Gold ETC (XGDU) TCO 0.12% (OCF 0.12%, Transaction 0%)

Gold trackers are Exchange Traded Commodities (ETCs).

UK Government bonds – intermediate

Cheapest

  • Invesco UK Gilts ETF (GLTA) TCO 0.06% (OCF 0.06%, Transaction 0%)

Next best

  • Lyxor Core UK Government Bond ETF (GILS) TCO 0.08% (OCF 0.07%, Transaction 0.01%)
  • Vanguard UK Gilt ETF (VGVA) TCO 0.1% (OCF 0.07%, Transaction 0.03%)
  • Fidelity Index UK Gilt Fund P (GB00BMQ57G79) TCO 0.1% (OCF 0.1%, Transaction 0%)
  • iShares GiltTrak Index Fund (IE00BD0NC250) TCO 0.12% (OCF 0.1%, Transaction 0.02%)

UK Government bonds – long

Cheapest

  • Vanguard UK Long-Duration Gilt Index Fund (GB00B4M89245) TCO 0.12% (OCF 0.12%, Transaction 0%)

Next best

  • SPDR Bloomberg Barclays 15+ Year Gilt ETF (GLTL) TCO 0.16% (OCF 0.15%, Transaction 0.01%)
  • iShares Over 15 Years Gilts Index Fund (GB00BF338G29) TCO 0.16% (OCF 0.16%, Transaction 0%)

UK Government bonds – short

Cheapest

  • Invesco UK Gilt 1-5 Year ETF (GLT5) TCO 0.06% (OCF 0.06%, Transaction 0%)
  • L&G UK Gilt 0-5 Year ETF (UKG5) TCO 0.06% (OCF 0.06%, Transaction 0%)

Next best

  • Goldman Sachs Access UK Gilts 1-10 Years ETF (GIL5) TCO 0.07% (OCF 0.07%, Transaction 0%)
  • iShares UK Gilts 0-5 ETF (IGLS) TCO 0.1% (OCF 0.07%, Transaction 0.03%)
  • JPMorgan BetaBuilders UK Gilt 1-5 yr ETF (JG15) TCO 0.1% (OCF 0.07%, Transaction 0.03%)

The Goldman Sachs ETF has a longer bond duration than the other short-dated funds in this section, but it’s not quite an intermediate fund. 

UK Government bonds – index-linked

Cheapest

  • Lyxor Core UK Government Inflation-Linked Bond ETF (GILI) TCO 0.08% (OCF 0.07%, Transaction 0.01%)

Next best

  • Vanguard UK Inflation Linked Gilt Index Fund (GB00B45Q9038) TCO 0.13% (OCF 0.12%, Transaction 0.01%)
  • iShares £ Index-Linked Gilts ETF (INXG) TCO 0.14% (OCF 0.1%, Transaction 0.04%)
  • L&G All Stocks Index Linked Gilt Index Trust I (GB00B84QXT94) TCO 0.15% (OCF 0.15%, Transaction 0%)

UK index-linked funds may not be suitable for your portfolio due to embedded real interest risk. We’ve switched our Slow and Steady portfolio to a short duration global index-linked fund hedged to GBP. See below. 

Global inflation-linked bonds hedged to £

Cheapest

  • Lyxor Core Global Inflation-Linked 1-10Y Bond ETF (GISG) TCO 0.22% (OCF 0.2%, Transaction 0.02%)

Next best

  • iShares Global Inflation Linked Government Bond ETF (GILG) TCO 0.24% (OCF 0.2%, Transaction 0.04%)
  • L&G Global Inflation Linked Bond Index Fund I (GB00BBHXNN27) TCO 0.27% (OCF 0.23%, Transaction 0.04%)
  • Xtrackers Global Inflation Linked Bond ETF (XGIG) TCO 0.28% (OCF 0.25%, Transaction 0.03%)
  • Royal London Short Duration Global Index Linked Fund M (GB00BD050F05) TCO 0.27% (OCF 0.27%, Transaction 0%)

All are short and intermediate options, hedged back to Sterling. The Royal London fund is active.

Global government bonds hedged to £

Cheapest

  • Amundi Index JP Morgan GBI Global Govies ETF (GOVG) TCO 0.17% (OCF 0.15%, Transaction 0.02%)

Next best

  • HSBC Global Funds ICAV – Global Government Bond Index Fund – BDHGBP (IE00BDFD2S67) TCO 0.22% (OCF 0.22%, Transaction 0%)
  • iShares Global Govt Bond ETF (IGLH) TCO 0.25% (OCF 0.25%, Transaction 0%)
  • Xtrackers Global Government Bond ETF (XGSG) TCO 0.29% (OCF 0.25%, Transaction 0.04%)

All hedged back to Sterling. The HSBC fund invests in emerging markets but the allocation is unknown as it is highly opaque for an index fund. Proceed with caution. 

Total global bonds hedged to £ (government and corporate)

Cheapest

  • Amundi Index Global Aggregate 500M ETF (AGHG) TCO 0.09% (OCF 0.08%, Transaction 0.01%)

Next best

  • iShares Core Global Aggregate Bond ETF (AGBP) TCO 0.1% (OCF 0.1%, Transaction 0%)
  • iShares Global Aggregate Bond ESG ETF (AEGG) TCO 0.12% (OCF 0.1%, Transaction 0.02%)
  • Vanguard Global Bond Index Fund (IE00B50W2R13) TCO 0.27% (OCF 0.15%, Transaction 0.12%)
  • Vanguard Global Short Term Bond Index Fund (IE00BH65QG55) TCO 0.29% (OCF 0.15%, Transaction 0.14%)

All hedged back to Sterling.

Using cheapest index funds UK list

You can precisely identify the low-cost index funds you’re after by using the ISIN codes or ETF tickers we provide in brackets. (This piece helps explain fund names.)

We’ve given the code for the accumulation fund, GBP-priced version where available. Income distributing versions are usually offered too.

This piece explains the ins and outs of accumulation vs income funds.

  • We’ve included an Environmental, Social, and Governance (ESG) index tracker option for each sub asset-class where available. 
  • Actively managed funds are used when low-cost index funds are not available. Active funds are noted in the relevant sections.
  • We don’t show platform exclusive index trackers as they’re generally not a good deal overall.

Cheap index trackers and costs – extra detail

The bid-offer spread is an additional cost you may incur that isn’t captured by the TCO figure above.   

This charge shouldn’t be significant for most passive investors anyway but you can gauge it by using the estimated spread published by Hargreaves Lansdown on its fund pages. 

The final significant cost you’ll pay are broker fees – we track those on our broker comparison table.

Watch out for FX fees charged by brokers on certain funds. This is something of a stealth cost that’s quite avoidable.

Some providers of synthetic ETFs publish a ‘swap fee’ on top of the TER. Just add the swap fee to the TER to get the Ongoing Charge Figure. This is how we’ve treated swap fees in the listing above. 

It’s worth knowing that a fund’s transaction costs can fluctuate quite a lot from period to period, especially if there’s excessive turnover in the fund’s index.

So don’t feel like you instantly need to switch if your fund’s transaction costs suddenly spike.

Keep your fund, and its main rivals, under review for up to a year before coming to any definitive conclusions about its competitiveness.  

Some index trackers register negative transaction costs but I’ve disregarded that from the TCO calculations above. That’s because negative transaction costs amount to an accounting technique that’s not sustainable over time.

Low-cost index funds UK – fees to ignore

Ignore a fund’s Annual Management Charge (AMC). The AMC is a very old-fashioned fee metric that excludes important fund costs.

This is why a fund’s AMC is typically lower than its OCF or TER.

Do not add the AMC to the OCF or TER.

The OCF and TER are interchangeable, so choose one of those costs (the highest) and add it to the fund’s transaction cost to calculate its TCO.

Treat negative transaction costs as zero.

Ignore entry and exit charges for index trackers where you see them mentioned in fund literature such as Key Investor Information Documents.

These fees do not apply to ordinary investors like you and I. They’re levied on institutional participants dealing directly with the fund provider.

The same goes if you see an eye-watering minimum purchase figure (such as £100,000) to buy into a fund.

Be guided by your broker’s minimum purchase amount.

Final thoughts on low-cost index funds and ETFs

There’s often little to distinguish index trackers that are closely matched in price. However we have previously written a few pieces to help you resolve tie-breaker situations:

If you’re looking for the cheapest place to buy and hold your low-cost index funds then take a look at our broker comparison table.

Our article on designing your own asset allocation will help you construct your own portfolio. If you want a quick shortcut, you can do a lot worse than checking out our best multi-asset fund picks for an instant portfolio solution.

We update this list periodically. Quoted TCOs may date, as fund groups fight their turf wars by undercutting each other (hurrah!) but this article should still prove an excellent starting point for your research.

If anyone comes across any better index tracker options I’d love to hear about them in the comments below.

Take it steady,

The Accumulator

Note: Some comments below may refer to an older collection of low-cost index trackers. Scroll down for the latest thoughts.

{ 814 comments… add one }
  • 799 Gizzard October 31, 2022, 1:21 pm

    You may have a typo: “Lyxor Core Morningstar UK ETF (LU1781541096) TCO 0.1%”
    If it’s an ETF, shouldn’t it have a four character designator (probably LCUK)?

  • 800 The Accumulator November 3, 2022, 12:30 am

    Nice one, Gizzard. It was the right ISIN number but I prefer to use tickers for ETFs. Well spotted, have updated – along with the new fund name it’s got too.

  • 801 D November 8, 2022, 3:36 pm

    I need some guidance on cash equivalent investments in a SIPP. I don’t want to invest a large cash holding all in one go (I really shouldn’t have read Paul Singer’s Elliott letter last night!) but my SIPP provider doesn’t pay interest. ETFs are preferable but funds will do, and I assume by their nature they will be actively managed. GBP money market funds come to mind but perhaps a US treasury GBP hedged fund will do? Specific fund suggestions welcome but perhaps more so is where do I start my own research? I can’t be the only one in this predicament. Thanks in advance.

  • 802 The Investor November 8, 2022, 3:51 pm

    @D — This is not personal advice, but for my part I am using the iShares ultrashort corporate bond ETF for that purpose.

    Ticker: ERNS (https://www.ishares.com/uk/individual/en/products/258120/ishares-ultrashort-bond-ucits-etf)

    Yield to maturity when I last looked was c. 3.75%.

    It’s not risk-free (corporate bonds, so some credit risk) but the duration is tiny (a couple of months) and it’s well-diversified.

    I wouldn’t put my net worth into it but personally I’m very happy with 2-5% invested here as needed.

    There may be better options around now with short gilts as I haven’t looked at this end of the curve for a few months, but when I last looked you’d need to take on much more duration than two months to get anything like that yield. Which is fine in an asset allocation but takes you far from ‘cash-like’.

  • 803 D November 9, 2022, 12:24 am

    @The Investor – Many thanks.

    A search of JustETF yields only two alternatives with under 6 months duration in GBP or GBP hedged (assuming we ignore the ESG flavour of ERNS).

    JPMorgan GBP Ultra-Short Income ETF, ticker JGST.
    https://am.jpmorgan.com/gb/en/asset-management/adv/products/jpm-gbp-ultra-short-income-ucits-etf-gbp-dist-ie00bd9mmg79
    YTM 3.48% and duration of 3.6 months according to the factsheet. I don’t fully understand what it invests in but it “may be concentrated in the banking industry”.

    Xtrackers Sterling Cash Swap ETF, ticker XSTR.
    https://etf.dws.com/en-gb/LU0321464652-gbp-overnight-rate-swap-ucits-etf-1d
    A money market fund that tracks SONIA (I assume it returns a little below base rate?). However, it’s synthetic and domicilied in Luxembourg.

    ERNS YTM is 3.72% and duration of 2.3 months.

    It’s perhaps nugatory given my brokers search doesn’t return anything for JGST or XSTR.

  • 804 The Accumulator November 9, 2022, 9:01 am

    @D – there’s the Vanguard Sterling Short-Term Money Market Fund

  • 805 D November 9, 2022, 4:08 pm

    @The Accumulator – Thanks.

    Vanguard Sterling Short-Term Money Market Fund GBP Inc (GB00BGB6GZ57) OCF 0.12%
    https://www.vanguard.co.uk/professional/product/fund/money-market/9974/sterling-short-term-money-market-fund-investor-gbp-income-shares
    I can’t trade it on iWeb/Halifax. Live chat said it’s because of the “nature of the fund, its a coded fund”. It’s on AJ Bell (but not for regular investment) and HL.

    There’s also the BlackRock Cash Fund Class D GBP Dist (GB00B42XLZ68) OCF 0.24% (brokers quote OCF 0.14%, iWeb quote typical transactions costs of 0.188%)
    https://www.blackrock.com/uk/individual/products/229426/blackrock-cash-fund-class-d-inc-fund
    It’s on iWeb/Halifax/AJ Bell (including regular investment)/HL.

    Using the AJ Bell method in your “Transaction costs” article:
    Vanguard – OCF/TER/AMC 0.12%, transaction fees 0.15% -> TCO 0.27%
    BlackRock – OCF 0.18%, AMC 0.25%, transaction fees 0.02% -> TCO 0.27% ?

  • 806 Evan December 2, 2022, 11:16 am

    I’m not sure if this is the best place for this question. But I’m wanting to add a little diversification to my held FTSE Global All Cap. I’m looking at adding Global Real Estate, as you’ve set out above and in the Slow and Steady. But when I look at, for example, the L&G Global Real Estate fund, all top 10 holdings are included in the Vanguard Global All Cap fund. So the crux of my question – does adding a real estate fund actually add diversity, or is it an active decision to bet more on real estate equities?

  • 807 Chris December 7, 2022, 11:58 pm

    The BlackRock, iShares, and Xtrackers funds mentioned hold different grades of credit:

    ERNS – credit rating at least BBB (lower medium grade). Holds corporate bonds from banks. Tracks “Markit iBoxx GBP Liquid Investment Grade Ultrashort Index”. Lends securities, up to 8.88% on loan in last year.

    XSTR – credit rating Aa3 (high grade). Appear to hold UK gilts and use swaps to return the daily gain of the index. Tracks SONIA. No lending.

    BlackRock Cash – credit rating at least A-1 (upper medium grade). Holds bank deposits and unsecured commercial paper from banks. Tracks SONIA.

    > It’s perhaps nugatory given my brokers search doesn’t return anything for JGST or XSTR.

    XSTR should be on iWeb.

    > Using the AJ Bell method in your “Transaction costs” article:

    Compare the tracking error (read the article “How to use tracking error to uncover the true cost of an index tracker”). In this case, BlackRock Cash and XSTR track SONIA very similarly (difference of 0.0125% a year on average). ERNS has historically returned about 0.5% more per year, but it’s tracking a different index (ultrashort bonds).

    iWeb also have ERND which is the iShares $ Ultrashort Bond ETF. At least BBB rated. Tracks “Markit iBoxx USD Liquid Investment Grade Ultrashort Index”. Might be worth considering as U.S. rates are higher (~5% YTM), but you’re exposed to currency fluctuations.

    Another interesting one is FEDG – Lyxor Fed Funds US Dollar Cash ETF. Should return 3.8% now (unhedged). It appears to be available on many UK brokers, but not iWeb.

  • 808 Chris December 8, 2022, 12:45 pm

    iWeb also have:

    – “L&G Cash Trust I Acc” fund which holds at least A rated bank deposits and short term bonds. It has an unusually large exposure to Japan (20% of holdings).

    – Lyxor Smart Overnight Return ETF (CSH2). Aims to track above SONIA, historically outperforms it by +0.1%. Min A2 (upper medium grade) banks deposits and corporate bonds with less than 6 months maturity.

    Average annual deviation from Sonia compounded index over last 5 years are:

    iShares $ ultrashort +1.2% (only 3 years data, USD returns as-is, does not include forex)
    iShares £ ultrashort +0.32%
    Lyxor Smart Overnight Return GBP +0.08%
    Vanguard Sterling short term 0% (only 2 years data)
    L&G Cash -0.08%
    BlackRock Cash -0.18%
    Xtrackers II GBP rate swap -0.18%

    So, iShares ultrashort has the highest return, and the lowest rated debt (BBB lower medium grade). At the other end there’s Xtrackers, with the lowest returns, but holding Aa3 high grade credit rated debt.

  • 809 The Accumulator December 8, 2022, 6:04 pm

    @ Evan – the answer is both! The amount of real estate you hold is an active decision. The idea is that it’s all in the aid of diversification as REITs are meant to behave a little differently from equity trackers.

    My own experience is that REIT trackers are highly correlated with standard equity index trackers though – they both tend to rise and fall together though returns will differ.

    The academic studies I’ve read on the topic bear this out – especially during a slump – so while there *may be* some diversification value to REITs, it’s likely to be limited.

    @ Chris – thank you for the extra detail and your thoughts. Re: ultrashort – makes sense that the riskier fund offers a little more return.

  • 810 D December 8, 2022, 9:59 pm

    @Chris – Thank you, that’s really useful info.

    My mistake, XSTR is on iWeb.

    I was aware of ERND (search ERNU on iWeb) but not FEDG. I’d like the option of a hedged $ cash-equivalent fund, and could even imagine switching between one and a £ fund depending on yield. Hedging makes more sense with higher yields, I assume?

    I’m averse to swaps, if only through ignorance.

    On iWeb I’m left with ERNS, BlackRock Cash or L&G Cash (not keen on the unusually large exposure to Japan). Essentially it’s higher risk/yield of ERNS v BlackRock/L&G Cash.

  • 811 Chris December 9, 2022, 12:37 am

    @D imho hedging would make sense if you have a large amount of money and want to convert it all to a USD fund at once. If you just want to average in over a long time then you may as well accept the currency risk.

    I had another look at iWeb, some other funds available are:

    – Pimco US Dollar Short Maturity Source ETF (IE00B67B7N93). This one looks good – currently 5.13% YTM and there’s a GBP hedged accumulating variant (IE00BK9YKZ79). Unfortunately iWeb have the unhedged variant, but don’t have the hedged variant. It’s a big fund too, $2461m AUM. Maybe iWeb will add it if you ask.

    – Royal London Short Term Money Market. Available in both income and accumulating variants. Tracks compounded SONIA almost perfectly. The biggest fund so far, £5244m AUM.

  • 812 Chris December 9, 2022, 1:23 am

    Also iWeb:

    – PIMCO Sterling Short Maturity ETF (QUID / IE00B622SG73). Current YTM 4.85%.

  • 813 James Wallace December 22, 2022, 5:06 am

    Hi Guys –

    Thanks so much – very helpful.

    Love the work you’re doing!

    Sidenote – I’d also point your readers to an interesting ESG Guide, including a comparison of the Vanguard ESG Global Fund with its non-ESG Version:

    https://www.bankeronwheels.com/review-of-ishares-msci-usa-sri-ishares-esg-msci-usa-leaders-ishares-msci-usa-esg-enhanced-vanguard-ftse-esg-global-all-cap/

    -James

  • 814 The Accumulator January 3, 2023, 10:06 am

    @ James – hey, thank you for the comment and for the link. That’s as good a deep dive into ESG as I’ve seen anywhere

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