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Low-cost index funds UK

Posted By The Accumulator On In Passive investing,Updated | 960 Comments

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 [1] 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 – speeding you towards your financial goals.

Our piece on management fees [2] 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 [3] (ETFs) over the past 20 years.

We believe 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 [4] and its Ongoing Charge Figure [5] (OCF).

Many outlets will only highlight 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. Such charges can rival the OCF in some of the 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.

Note II: we’ve also included the cheapest ESG option for each asset class.

Let’s go hunt for bargains!

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

Cheapest

Next best

World equity – developed world only

Cheapest

Next best

World ex-UK equity

Cheapest

Next best

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

World ex-US equity

Cheapest

World income equity

Cheapest

Next best

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

World small cap equity

Cheapest

Next best

US large cap equity

Cheapest

Next best

The tax treatment of US equities gives synthetic ETFs a tax advantage over physical funds. Find out more in our Best S&P500 ETFs and index funds [6] article.

UK large cap equity

Cheapest

Next best

UK equity income

Cheapest

Next best

Emerging markets equity

Cheapest

Next best

Property – global

Cheapest

Next best

Multi-factor – global

Cheapest

Next best

Factor investing [7] is effectively straying into active management territory. 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 multi-factor low-cost index funds for broad diversification.

Money market – GBP

Cheapest

Next best

Money market funds are actively managed.

UK Government bonds – intermediate

Cheapest

Next best

UK Government bonds – long

Cheapest

Next best

UK Government bonds – short

Cheapest

Next best

UK Government bonds – index-linked

Cheapest

Next best

UK index-linked funds may not be suitable for your portfolio due to embedded real interest risk [8]. We switched in our Slow and Steady portfolio [9] to a short duration global index-linked fund, hedged to GBP. For those, see below.

The iShares Up to 10 Years Index Linked Gilt Index Fund is relatively new but the best inflation-hedge from the selection above as it’s the shortest duration GBP linker fund [10] available.

Global inflation-linked bonds hedged to £ – short

Cheapest

Next best

The Royal London fund is actively managed.

Global government bonds hedged to £

Cheapest

Next best

Gold

Cheapest

Gold trackers are Exchange Traded Commodities [11] (ETCs). These are functionally index trackers like ETFs, only they’re focused on commodities investing [12].

Broad commodities

Cheapest

Next best

We’ve written a much more nuanced take on choosing a commodities ETF [13]. Sometimes cheapest isn’t best.

Using our cheapest index funds UK list

You can precisely identify the low-cost index funds you want to research via the ISIN codes or ETF tickers shown in our list in brackets. (We’ve previously explained how fund names [14] work.)

We’ve given the code for the GBP-priced accumulation fund [15] flavour where available. Income distributing versions are also usually offered. Make sure you understand the ins and outs of accumulation vs income funds [16].

Also note:

Cheap index trackers and costs – extra detail

The bid-offer spread [18] 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 anyway1 [19] but you can gauge it by using the estimated spread published by Hargreaves Lansdown [20] on its fund pages.

The final significant investing cost you’ll need to pay are broker fees. We track those on our broker comparison [17] table.

Watch out for FX fees [21] charged by brokers on certain funds. This is a stealth cost that’s quite avoidable.

Some providers of synthetic ETFs [22] 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 you can ignore

Don’t pay any attention to a fund’s Annual Management Charge (AMC). The AMC is an 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, however, 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. Such fees do not apply to ordinary investors like you and me. They are levied on institutional participants dealing directly with the fund provider.

The same thing 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 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 do take a gander at our broker comparison [29] table.

Our article on designing your own asset allocation [30] will help you construct your portfolio. If you want a quick shortcut, you could do a lot worse than checking out our best multi-asset fund [31] 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 then please shout in the comments below.

Take it steady,

The Accumulator

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

  1. Wide spreads are more typically an issue with individual company shares. [↩ [36]]