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Low-cost index funds UK

Posted By The Accumulator On In Passive investing,Updated | 820 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 and speeds 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.

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 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

Next best

The L&G ETF has an ESG remit.

UK mid cap equity

Cheapest

Next best

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 [6] 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

Next best

UK equity income

Cheapest

Next best

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

Cheapest

Next best

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

World equity – developed world only

Cheapest

Next best

The L&G ETF has an ESG remit.  

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 income equity

Cheapest

Next best

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

World small cap equity

Cheapest

Next best

Emerging markets equity

Cheapest

Next best

Multi-factor – Global

Cheapest

Next best

All factor investing [8] 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

Next best

No index fund alternative.

Property – global

Cheapest

Next best

There’s an unusual 1% exit fee on the Northern Trust fund. It’s also Dutch domiciled so watch out for withholding tax [9]. 

All-commodities

Cheapest

Next best

Gold

Cheapest

Gold trackers are Exchange Traded Commodities (ETCs).

UK Government bonds – intermediate

Cheapest

Next best

UK Government bonds – long

Cheapest

Next best

UK Government bonds – short

Cheapest

Next best

The Goldman Sachs ETF has a longer bond duration [10] than the other short-dated funds in this section, but it’s not quite an intermediate fund. 

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 [11]. We’ve switched our Slow and Steady portfolio [12] to a short duration global index-linked fund hedged to GBP. See below. 

Global inflation-linked bonds hedged to £

Cheapest

Next best

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

Global government bonds hedged to £

Cheapest

Next best

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

Next best

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 [13].)

We’ve given the code for the accumulation fund [14], GBP-priced version where available. Income distributing versions are usually offered too.

This piece explains the ins and outs of accumulation vs income funds [15].

Cheap index trackers and costs – extra detail

The bid-offer spread [16] 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 [17] table.

Watch out for FX fees [18] charged by brokers on certain funds. This is something of a stealth cost that’s quite avoidable.

Some providers of synthetic ETFs [19] 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 [26] table.

Our article on designing your own asset allocation [27] 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 [28] 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.