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Is it really worth trading in your index fund for a cheaper model?

If in doubt, go back to sleep

There’s not a lot to jump up and down about as a passive investor, which is why we tend to get over-excited around here whenever a new index tracker enables us to trim our costs by another 0.1%.

It’s rather like a retired detective deducing who ate all the cake at their kid’s birthday party. Our methods may seem extreme, but they help us to feel useful again.

The question is are we using a sledgehammer to crack a nut when we race to inform you that some tracker or another is now a smidgeon cheaper than last week?

Just how much do a fund’s costs need to fall before it’s worth selling out of the old and buying into the new and ever so slightly more efficient?

And should we bother to update the Slow & Steady Portfolio on account of cheaper funds? (Some readers think not).

Before we go on, investors who are new to the simple life of passive investing should avert their gaze now. You definitely do not have to go to these lengths to fine-tune your portfolio.

In fact, this piece is probably the most anal thing I’ve ever written.

It is strictly for hardcore investing life-hackers who are magnetically attracted to every infinitesimal advantage that crosses their path.

Numbers game

What we need to know is whether a new cut-price fund will make a worthwhile difference to our long-term investment prospects.

The numbers that matter:

  • The cost of holding the fund – Take into account the Ongoing Charge Figure (OCF), any initial charges, capital gains tax consequences1 and differences in dealing costs and platform fees.
  • Fund worth – The bigger your holding, the more you gain from OCF clipping.
  • Future contributions – See above.
  • Investment time horizon – The more years you hold, the more cost reductions compound to your advantage.
  • Return on investment – The bigger your pile, the more percentage fees like the OCF will cost you.

You can quickly use these factors to work out your savings with a fund cost comparison calculator. Let’s now use that calculator to rustle up a few illuminating examples of the impact of price pruning.

I’ll keep the numbers moderate so that it might represent the situation of a fairly typical small investor, rather than use a 40-year time horizon or similar to hammer home my point.

Example 1: Seeing the light

You get the biggest boost when the fee drop is pronounced, such as with a switch from active funds to passive funds.

Old fund OCF 1.5% 
New fund OCF 0.5%

Fund worth £10,000
Future contributions £100 a month
Investment horizon 20 years
Annual return 6%

Fund worth after 20 years cost savings:

Old fund = £62,676
New fund = £72,255

You gain £9,579 or 15.28%

That’s a lot of money that might as well be in your pocket rather than a fund manager’s. Especially when you scale that saving up across four or five funds in a portfolio.

Example 2: The Gillette switch

Now let’s look at a closer shave. The type you might make as a seasoned passive investor benefiting from tighter price competition in the tracker market.

Old fund OCF 0.5%
New fund OCF 0.25%

Fund worth £10,000
Future contributions £100 a month
Investment horizon 20 years
Annual return 6%

Fund worth after 20 years cost savings:

Old fund = £72,255
New fund = £74,892

You gain £2,637 or 3.65%

I’ll take that. It’s still a fair wedge, even though it may be 20 years off.

Example 3: The salami slicer

What about the kind of 0.1% finessing that prompted the wholesale switching of our Slow & Steady passive portfolio back in 2012?

Old fund OCF 0.3% 
New fund OCF 0.2%

Fund worth £10,000
Future contributions £100 a month
Investment horizon 20 years
Annual return 6%

Fund worth after 20 years cost savings:

Old fund = £74,357
New fund = £75,432

You gain £1,075 or 1.45%

£1,000 eh? Well, I’d definitely snatch your hand off if you gave that to me now. But that’s actually the gain you’ll make in 20 years time.

Just how much is that worth now?

The present value of money

The time value of money is a concept that helps explain our natural intuition that money gained in the future is less valuable than cash in the hand right now.

We can estimate how much the future £1,075 gain from the last example is worth to us now by using a present value of money calculator.

If I assume the same 6% interest rate and 20-year stretch, then the calculator tells me the present value of £1,075 is £335.

Whether you’re prepared to get out of bed for that kind of money is a personal choice. I am.

Let’s say it takes five hours to research the new fund, take a decision, make the trades and track the changes. And let’s say I charge out my free time at £20 an hour. That means that any switch that delivers more than £100 today is worth my time.

Using a future value of money calculator it turns out that £100 today is worth £321 in 20 years time. So any switch that saves me over £321 in 20 years is worth the faff (given my assumptions above).

Sorry, I told you this was beardy. And I must repeat that none of this is compulsory!

Previously I’ve always compared funds using the fund cost comparison calculator to decide whether a switch was worth the hassle. But there’s something about blogging that forces you to don your white coat and make matters more scientific.

Just one last thing

Sadly there is another factor you need to think about before you go a-switching, which is the risk of being out of the market while the transaction takes place.

If you invest in index funds then you can be sitting in cash for a few days, after selling the old fund and while you’re waiting for your broker to stop playing on Facebook and buy your new fund.

If shares surge in the meantime then the transaction will cost you more than you bargained for, because your cash in limbo will not be invested and so will not track the gains.

How much might it set you back? Needless to say, that’s complicated, but the short answer is – if you’re very unlucky – it might actually do more damage than paying slightly higher ongoing fees.

It’s potentially worth considering ETFs over index funds from an instant trading perspective if the risk of being out of the market feels like a biggie to you.

Take it steady,

The Accumulator

  1. See ivanopinion’s excellent comment 41 below []
{ 88 comments… add one }
  • 1 Rob January 15, 2013, 10:59 am

    Excellent blog, just two points. Are you assuming all trading is done at zero commission and what about stamp duty?

  • 2 westy22 January 15, 2013, 11:42 am

    I believe that TA was speaking about funds specifically so no SDRT and, I assume, £0 initial cost and £0 switch costs. Of course, if buying Vanguard trackers there is sometime an ‘initial cost’ that may be incurred with certain flavours of their funds.

  • 3 MrMonkeyMoustache January 15, 2013, 12:27 pm

    Thanks for another interesting post. With so little experience in investing, the big question in my mind is do fund costs tend to be stable long term? I ask as, for example your slow and steady switch from HSBC to Vanguard UK Equities would take 5 years to break even, given the intial 0.5% dilution fee. This is despite nearly halving the TER.

  • 4 Jumper January 15, 2013, 1:36 pm

    One straightforward case. Sippdeal say they are planning to offer a simple conversion of share classes post-RDR. That could change HSBC trackers from the older 0.28% versions to 0.18% class C shares for the cost of a stamp or phone call, with no time out of the market or need to research a new fund. Achievable without getting out of bed…

    Regarding being out of the market where there’s a real fund switch, if a broker/supermarket doesn’t charge for fund deals one way to mitigate this is to do the switch between funds in small periodic bites, maybe in conjunction with regular new investments. More work, though.

  • 5 The Investor January 15, 2013, 1:54 pm

    Regarding being out of the market where there’s a real fund switch, if a broker/supermarket doesn’t charge for fund deals one way to mitigate this is to do the switch between funds in small periodic bites, maybe in conjunction with regular new investments. More work, though.

    I’d second this as a pragmatic strategy, that takes advantage of the absence of dealing fees for tracker funds.

    Without wanting to preempt next week’s post, the big risk is you sit out of the market wholesale for a few days. If you shift across over a longer time period, the ups and downs will likely even out unless you’re spectacularly unlucky.

  • 6 Passive Investor January 15, 2013, 2:17 pm

    Thanks for another great post Accumulator. No need to apologise either. As you have noted, sadly denied the pleasures of stockpicking, market timing and technical analysis we passive investors have to get our kicks somewhere!

    By coincidence, post RDR with in specie transfer I was recently trying to work out whether to move a FTSE all share tracker ISA from Fidelity to Best Invest to get the benefit of the lower Vanguard TER and tracking error. The figures for a lump sum and long time period amazed me:


    (1) £100K lump sum, 25 year investment horizon, 6% growth
    (2) Fidelity UK MBI 0.3% TER, 0.7% tracking error
    Vanguard UK index 0.15% TER, 0.5% purchase cost, 0.1% tracking error
    (3) Best Invest Platform Charge £60 pa, Fidelity nil

    Based on the TER (0.15 vc 0.3) the Vanguard on Best Invest fund will be ahead in 6 years and after 25 years the Vanguard Fund will be worth nearly £432K and the Fidelity Fund will be worth only £422K. The difference of around £10 K has a present value (discounted at 6%) of £2,300. Worth an hour or so I’d say!

    Based on the tracking error data (Vanguard 0.1%, Fidelity 0.7%) the figures are startling though. The Vanguard on Best Invest will be ahead after a year. After 25 years the Vanguard fund will be worth £438K and the Fidelity fund will be worth £382K. A difference with a present value of just under £30K!

    I worry about time out of the market too. My strategy is to make the exchange in about 6-8 trades. If the buy and sell orders are set at the same time the money is out of the market for half a day (Fidelity is valued at midday and Vanguard at market close – I think). With 6 trades you should lose a little on 3 but gain a little on 6.

  • 7 Ash G January 15, 2013, 3:03 pm

    “Based on the tracking error data (Vanguard 0.1%, Fidelity 0.7%) the figures are startling though. The Vanguard on Best Invest will be ahead after a year. ”

    I was under the impression that tracking errors were random, and could be positive as well as negative. Therefore I don’t see why you would assume the tracking error will always be against you.

    I would be interested to hear other people’s thoughts on this, how important is tracking error?

  • 8 Passive Investor January 15, 2013, 3:26 pm

    I don’t know the technical details but tracking error depends on a lot of factors. How efficiently the fund is run, whether there are economies of scale, whether stocks are loaned out and whether profits from this are returned to the fund (or trousered by the manager), whether trading costs are kept low. Doubtless there are other factors too.

    Vanguard has a long track record of keeping tracking error to an absolute minimum and other things being equal I would always choose Vanguard over other managers. (I am just a private investor with no axe to grind).

  • 9 The Investor January 15, 2013, 5:11 pm

    @Ash — Tracking error isn’t always random. High costs / expenses / charges made to the tracker fund, for example, will consistently reduce its return versus the index.

  • 10 ivanopinion January 15, 2013, 9:02 pm

    One way to avoid being out of the market at all is to buy and sell at the same time. I think this is possible if you are buying and selling on the same platform. (You do the sale first, which should mean that you are credited with the sales proceeds. You can’t withdraw the proceeds until the deal is settled, but I think platforms do allow you to use the proceeds to make a purchase, as this will have the same settlement timing. I’m pretty sure ATS allowed me to do this.)

    If you are switching platforms as well as funds, then it is still possible to buy and sell at the same time, as long as you have spare cash to fund the purchase. Day 1, deposit cash with new platform, make the purchase and immediately afterwards sell the old fund on the old platform. Day 3, the purchase is settled using the cash you deposited and the sale settles so the proceeds are credited to your account with the old platform and you withdraw it, putting the cash back where it came from two days earlier. That’s what I am planning to do, shortly, using money that would otherwise be on instant access deposit earning 3% per annum, which is 0.025% for three days. On a £10,000 investment, I lose interest of £2.50.

  • 11 GilesR January 15, 2013, 10:44 pm

    Being out of the market while changing funds: surely (give or take) you’re as likely to miss a big fall as a big rise. Thanks for all this by the way.

  • 12 Passive Investor January 16, 2013, 12:20 am

    @GilesR That’s more or less true though because the market does rise over the longterm you are slightly more likely to miss a market rise rather than a fall.

    The real issue though is whether there is any point in striving to save 0.1% in annual costs when there is a risk ?10% of missing out on a 1% or more market rise over the course of a few days.

    When swapping between funds to save costs I have always done it in 5 or 6 trades (for some of the trades the market will fall for some it will rise during the out of market periods). I almost never take money out of the market for more than a day. Remember that most market gains in a year take place over a dozen or do days when the market rises sharply. It would hurt to miss one of these days.

    If you do take money out of the market for a short period one option is to hedge with a spread bet. The idea is to place a bet that the market will rise during the time your money is out of the market. If the market does rise the spread bet will compensate you for the gains you would have made if you had stayed invested. If the market falls the spread bet will lose money but you will be compensated girl this by being able to re- invest at better prices.

  • 13 Passive Investor January 16, 2013, 7:37 pm

    Fund Cost Calculator

    I have devised a simple Excel spreadsheet which compares the effects of costs over different investment lifetimes.

    The user can enter the growth rate, the value of a lump sum and regular investment amount. In addition the costs of two funds including purchase charge, regular TER (or tracking error) and platform fee can be entered.

    If anyone would find this useful I would be happy to send it by email.

  • 14 Steve January 16, 2013, 7:52 pm

    Re: fees, is the Hargreaves Lansdown £2 per month charge for index funds per fund holding or per ISA year.

    For example if I invest £10,000 in Vanguard US Index Fund for tax year 2012/13, and then another £10,000 in the same Vanguard US Index Fund in 2013/14 tax year, does that incur one £2 pm charge on the total £20,000 invested or do you incur two £2 pm charges (for a total £4 pm) as the funds are split across two ISA tax years?

    Obviously if it is the latter the H-L option would be not sensible as a place to hold Vanguard funds.

    I know there are other options (such as TD Direct, Alliance Trust etc) for Vanguard, but was specifically interested in the situation at H-L.

  • 15 The Accumulator January 16, 2013, 11:00 pm

    @ Rob – yes, I should have been a bit clearer about that. I do assume trading at zero dealing costs. Obviously if that’s not the deal you have with your broker then take that into account as mentioned in the first part of the piece. Stamp duty isn’t an explicit cost that needs to be taken into account with most index funds. If it is, e.g. with Vanguard’s UK equity funds, then you’ll see it come up as part of the initial charge.

    @ Mr Monkey Moustache – that’s an impossible question to answer. Vanguard put enormous pressure on other providers to lower costs a few years ago, now RDR has changed the game again. There’s a price war going on in the States that’s leading to regular cuts. Very difficult to predict whether that’s going to happen here, although Vanguard’s model is predicated on under-cutting the opposition.

    @ Jumper – thanks for the tip-off!

    @ PassiveInvestor – very interesting analysis. Especially as I happen to hold some of that Fidelity fund from way back when. I did read a piece by one of their guys saying that some of that 0.7% was a terrible misunderstanding born from valuation points that differed from the index. Hmm. Be interesting to look at longer-term data for their tracking error.

    How do you manage to only stay out of the market for a day. My broker can’t perform a fund sell / buy trade in less than 2. Would you mind sending your spreadsheet to me? That could prove very useful. Email: taccumulator@gmail.com

    @ Steve – the charge is per fund. So in your case that’s £24 for the year as long as you only hold 1 fund.

  • 16 Passive Investor January 16, 2013, 11:25 pm

    @Accumulator Fidelity Tracking Error 0.7

    Here is Tom Stevenson of Fidelity owning up to the tracking error


  • 17 Greg January 17, 2013, 12:31 am

    Just a quick warning before people start shuffling their holdings if they are using TDDirect. (The broker I use.)

    For “Clean” shares, they will start charging a 0.35% platform fee from August. Now it isn’t entirely clear which shares are “clean”, though it is reasonable to assume that almost all trackers fit into this. (If using a Vanguard LS fund, this means HL get better value at about £6.5k.)


    more info:

    One interesting possibility is that as the HSBC retail trackers _do_ have a kickback (which TD will refund) they should remain at a cost of 0.27% -0.1% kickback refund = 0.17%! Whereas, if you use the clean shares 0.17%+0.35% = 0.42%

    This might be a bit irritating for TA, as he’s just moved out of them!

    Of course, this assumes TD don’t do something about this anomaly! Anyone care to prod them and see what they say?

    As for time out of the market, I say don’t worry about it. It really isn’t big deal in the long run. (I’m in the process of moving my active funds to clean classes, though I’m doing it one fund at a time.)

    Oh and especially for TA, here’s a nice in-depth analysis on whether it is worth picking up a penny you find in the street!


  • 18 Snowman January 17, 2013, 12:41 am

    I used to say ignore tracking error and concentrate on TER as most identified tracking errors (excluding the TER) were random and not systematic, and what looked like a tracking error would later disappear. However the Moneybuilder UK index fund is the fund that made me change my mind on that.

    I’ve looked at prices going back to 1997 and yes the tracking error is around 0.6 – 0.7% for the Fidelity Moneybuilder UK index fund and it’s concerned me enough to move money out of that fund. It’s about 0.6% from September 2005 when they reduced their amc significantly.

    The L&G UK Index tracker (which has a fairly steady TER of around just over 0.5% so is good as a comparator) has a slighly lower tracking error which shouldn’t be the case for a fund with a much higher TER.

    The latest Fidelity long report at April 2012 states a tracking error adjusted for price timing differences etc which is around 0.58%, perhaps some credit to them for disclosing that but worrying all the same as it confirms all we thought.

    The May 2012 IMA report Fund Mangement Charges, Investment Costs and Performance looked at tracking error relative to TERs for trackers (well worth a read) and suggested additional tracking error over that expected from the TER to be perhaps around 0.1% to 0.15% which is much less than the 0.3% or so additional tracking error of the Fidelity Moneybuilder UK index fund.

    The M&G all share tracker and HSBC all share trackers track much closer to their TERs (about 0.1% extra at most).

    And of course as we know the tracking error on the Vanguard all share tracker is a super consistent 0.1% so under its TER of 0.15%.

    I have no explanation for the high tracking error. I did look in their accounts and explicit costs (such as stamp duty and SDRT aren’t particularly high relative to other funds). And while they don’t do stock lending, stock lending is negligible for other all share trackers that do.

  • 19 ivanopinion January 17, 2013, 10:18 am

    @ Greg

    As discussed elsewhere, yes, it is possible that the HSBC Retail versions of the trackers might not be subject to the new 0.35% TDD fee in August, because they do include an amount that is intended to fund commission payments and could therefore be described as not being clean. However, in cases where they do pay this commission, it is platform commission, not trail commission, and TDD are saying that the new fee will apply in cases where they do not receive trail commission. They say nothing about platform commission. Furthermore, HSBC does not pay this commission to all platforms; it only seems to pay it to a select few who manage to negotiate this. I can’t see TDD as being likely to fight to receive this commission if this means that it can no longer charge the 0.35% fee. Personally, I wouldn’t pin any hopes on this being some sort of loophole to avoid the 0.35% fee when it is introduced in August.

  • 20 Jumper January 17, 2013, 12:44 pm


    For what it’s worth, TDD say this about the new charge and “clean” funds:

    “… we will not be charging a platform fee on clean funds until August 2013. The fee we will introduce at this time will be 0.35%. … Under ‘Fund Universe’ there are now four options, Unit Trusts and OEICs with no commission included (these are the new clean funds), Low-cost Tracker Funds, Discounted Funds and UK Domiciled funds which contain commission.”

    HSBC retail funds currently appear in the TDD fund screener under the “Low Cost Tracker funds” universe, making them fee-free. For now; no idea if this will persist. If it doesn’t this will add over £1000 to the annual cost of running my portfolio, and forcing a move out to a platform with a flat charge.

    For many low cost passive investors the RDR is turning out to be nothing but trouble. Thanks a bunch, FSA.

  • 21 ivanopinion January 17, 2013, 3:09 pm


    But some of the funds in the “no commission included” category definitely do still charge platform commission. For example, Invesco Perpetual High Income No Trail. So when they say no commission included, what they mean is no trail commission.

    They also say:

    “Now that RDR is in place, a new range of funds – known as clean share classes or ‘clean funds’ – are being launched by Fund Managers. These funds have lower annual management charges because they do not include any trail commission. ”

    It is implicit in that statement that they consider a fund to be clean if it contains no trail commission.

    Perhaps I am wrong, and the fact that HSBC Retail trackers are not currently shown in the no commission category does indicate that this will be a loophole to avoid the new 0.35% fee. However, it would make no sense for TDD to allow this to happen, so personally I wouldn’t count on it. If you are already with TDD, then you might as well hang on for now and see what happens in August. If you are contemplating moving to TDD, then it is a more difficult choice, although I understand that last time they changed their fees they waived exit fees for anyone who wanted to leave. As long as they do this in August, you wouldn’t be any worse off. Personally, I have decided not to switch to TDD, because I don’t want to be depending on them waiving the exit fees.

  • 22 Jumper January 17, 2013, 4:23 pm


    Oh, I’m certainly not counting on TDD not adding a fee for HSBC retail funds also. They might escape, but might not. I’ll be watching for the latter like a hawk. Maybe things will improve in future, but at the moment all I’ve seen personally from the RDR is a bunch of upheaval and ADDED expense, a very long way from the consumer benefits touted by the FSA.

  • 23 Steve January 17, 2013, 7:36 pm

    Re: Tracking Error on HSBC Trackers

    Does anyone know for sure whether the Tracking Error figures on HSBC Factsheets are before fees are taken into account?

    I asked HSBC about this a couple of years ago and they said the Tracking Error included the TER, but looking at some of the recent factsheets that would mean the fund would have to be outperforming the index before fees, which I guess is theoretically possible but seems unlikely.

    For example the factsheet for the HSBC European Index fund for October 2012 has the following info:

    OCF/TER: 0.35%
    Tracking Error: 0.18% (3 yr annualised)

    I’m assuming therefore the total deviation from the index is 0.35% + 0.18%=0.53% ?

    However, it is difficult to reconcile this with the performance figures on the factsheet, which shows a 2.2% underperformance vs the index in the 12 months to October 2012, and a circa 1% annualised underperformance vs the index in the 3 years to October 2012. I guess it is possible the fund is being compared to the wrong index on the factsheet – the peformance data is not supplied by HSBC.

    The factsheet is on the following link:

  • 24 Passive Investor January 17, 2013, 9:16 pm

    @snowman. Thanks for the confirmation of the high Fidelity tracking error. I have decided to swap all my Fidelity UMBI to Vanguard in the next 6 months

    @steve. My understanding is that the tracking error is the most reliable guide to performance and that this can sometimes as with Vanguard be less than the TER. (I know for example that they make money for the fund by lending out stocks). I completely agree with you that there is a huge vacuum of reliable standardised data regarding tracking error. This is a real pity as it is the only statistic that really matters for index investors. I don’t understand why the FSA don’t insist that some kind of standardised tracking error appears in the factsheet.

  • 25 Greg January 18, 2013, 1:26 am

    I’ve just taken a look at the trail commission rebate & commission fee for one of my holdings.

    First State GEML A (TER: 1.58%)
    (B class has a TER of 0.91%, i.e. 0.67% lower.)
    The trail commission rebate came to 0.5% (assuming the platform fee was 0.35%)

    Therefore I conclude that TD are not refunding 0.17%, which must be a platform fee. (Odd as I had assumed it was 0.25%)

    I haven’t done this for my other holdings but I assume they will give similar results.

    As for tracking error, can’t you just put them all on a chart in morningstar? Thinking about it, perhaps ETFs have lower tracking errors due to their mechanism? (Plus, I assume synthetic ones are even better, though some people don’t like them.)


  • 26 The Accumulator January 18, 2013, 9:29 am

    @ Greg – Ha Ha. Thanks for the link to picking up pennies piece. Made me laugh. It would seem that all was going well on that little revenue stream until you made me read that article 😉

    I haven’t found a good, clean way of comparing tracking errors other than mechanically checking returns as Snowman has done. Thanks for the tip-off on that report, Snowman. A great find! You’re going great guns, first off the mark with the TD info on another thread too.

    @ Steve – I think, though I’m not sure that the tracking error definition used by HSBC is the standard deviation of returns relative to the returns of the index. Which doesn’t marry up with a simple comparison of fund returns versus the index returns. For simplicity sake, you’re better off comparing annual fund returns versus index returns and seeing how far off beam the fund goes. Some call this ‘tracking difference’, but nearly everyone else calls it tracking error.

    @ PI – thanks for the link to the Fidelity piece. That was the one I’d read but I’d misremembered how bad it was. That seals it, I’m outta that fund.

    @ Greg again – TD haven’t refunded any commission to me on HSBC retail trackers which would tally with PI’s platform commission comments.

    Regardless, it beggars belief that TD will ultimately let investors slip through a loophole based on the semantics of platform commission vs trail commission. What perhaps does matter is whether the FSA ban the receipt of commission for platforms in their RDR 2 report later this year. If they do then I guess old style retail funds will come off the shelves except for legacy holdings. If not, then maybe there’s a chance of slipping through the net.

    Breakevens on 0.35% platform fee:

    Alliance Trust @ £48 annual charge = £13,714

    iii @ £80 annual charge = £22,857

    HL @ £24 annual charge (1 fund portfolio) = £6857

    Portfolio values below these breakeven rates are better off at TD (in a regular trading ISA).

    There are dealing fees to account for at iii and Alliance Trust too. Estimate your likely annual dealing fees and add them to the annual charge / platform fee.

    Then the calculation is: Total costs / 0.0035 = £break-even

    The breakeven figures are for a portfolio holding clean-priced index funds in a single account. If you hold two accounts (e.g. you and a partner), the breakeven point for ATS and HL doubles.

    If you hold more than one tracker in HL, multiply the breakeven point by the number of funds.

  • 27 Jumper January 18, 2013, 12:47 pm

    @TA, worth adding Bestinvest to the list of suitors for RDR clean funds.

    £60 annual charge no matter how many non-commission funds you hold, and no funds dealing fee. That’s £17,143 break even, but could beat many or even all of the other three mentioned if you’re a regular investor and/or have diversified across funds. Bestinvest also have fairly skimpy share dealing fees, if ETFs are your preferred narcotic. No connection, by the way, just a current customer.

  • 28 ivanopinion January 18, 2013, 2:26 pm

    That’s not a bad deal with Bestinvest, if there are no dealing fees for buying and selling funds. On the other hand, I assume the £60 fee is per account, so if you and your spouse each have an ISA account and an unwrapped account, that’s £240 annual fee, compared with £80 at Interactive Investor.

    For now, you would need to take into account any funds that are not completely clean, because Bestinvest generally do not give good rebates. For instance, on Fidelity South East Asia, the new “clean” fund class has an AMC of 1% and still pays platform commission. You get part of this (0.14%) rebated with Interactive Investor, whereas I assume Bestinvest gives you no rebate.

  • 29 The Accumulator January 18, 2013, 6:52 pm

    Thanks, Jumper. I think my next post better be a ‘state of the nation’ round-up of the current situation. See if we can bring some clarity to all of this.

    I shall even taken into account the His & Hers situation, thanks to you Ivan, I haven’t worried about that before.

    Rebates are an interesting one. Clean class funds may well drop the TERs on small cap or value active funds to the point where I’d consider them as a passive investor, given the paucity of my tracker choices. Will need to look into it, but very interested to hear from anyone doing this to tilt their portfolio.

  • 30 ivanopinion January 18, 2013, 7:34 pm

    Yes, with AMCs falling to 0.75% on the majority of actively managed funds, they are now more expensive than trackers were, before Vanguard came into the market in the UK and dragged down prices. Trackers are still cheaper, but the handicap that active funds must overcome is now much smaller than previously. As I understand it, most of the research shows that many active managers can beat the market, but they just can’t beat it by a margin equal to the AMC that they charge. They are therefore operating under a handicap, but this is smaller than before.

    RDR also potentially changes comparison with investment funds, many of which were previously considerably cheaper than an equivalent unit trust. Some of the long established general funds, like Foreign & Colonial and City of London, have TER’s of around 0.5% or 0.6%, but this is no longer so much cheaper than unit trusts. The majority of investment funds are more like 1.0%, which once would have looked cheap, but now looks expensive.

  • 31 Richard January 18, 2013, 11:32 pm

    Passive Investor says “That’s more or less true though because the market does rise over the longterm you are slightly more likely to miss a market rise rather than a fall. ”

    Except you choose the day you exit the market.

    http://www.investmentwarrior.com/Archived%20Articles/111402.htm claims that ” If today’s market is down…there is a 62% probability that tomorrow’s market will also be down , and only a 38% probability that the market will close higher. ”

    If this is true and you will be out of the market for a few days then the thing to do is start your switch the day after the index has its first negative day.

    I haven’t done much research on this, and suspect it depends which index you’re in etc (and the size of the moves may actually average out to making a 50.50 shot again).

  • 32 ivanopinion January 19, 2013, 10:21 am

    In post 30, I meant less expensive.

  • 33 Passive Investor January 19, 2013, 10:30 am

    @Richard Your point is really interesting and a bit troubling to a zealous passive investor like me. It reminded me of a colleague who went part-time to trade foreign currency on the basis of the pattern of market movements shortly after they opened. We were like ships passing in the night when we discussed investing but I remember he told me that he paid off quite a large part of his mortgage with this trading strategy. Also of course (before forecasts got so good) they always used to say that the best way to pick tomorrow’s weather was by expecting the same as today’s.

    I didn’t quite believe the information in the link you sent so I have just looked at the daily FTSE 100 changes from 1/1/2009 – 31/12/12 (approx 1000 trading days). As you predicted I found 320 days where the market fell after a fall the day before and only 121 where the market rose after a fall the day before. In other words if the market is down I found a 73% probability that tomorrow’s market will also be down. Amazingly close to the figure you quote.

    Where does that leave me – I am not sure and certainly would be interested in further comments from you and others though. A few quick thoughts:

    1 The strategy may not be practical with funds

    In fact with a fund you often have to place the sell order the day before it actually gets sold so you may not know how the market has finished. There may also be an issue about when the fund gets values (from memory Fidelity is midday and Vanguard is market close). If you are placing the trade to exchange funds you also have to place a buy order with additional delay which complicates things further.

    2 Even if the strategy can be implemented it may not be reassuring

    On the basis of the pattern you describe you are still going to be wrong some 30% of the time. This means that a significant minority of people who execute a fund exchange will take a hit on market movements. In theory at least this hit may be enough to mean that the fund exchange is a bad idea if the difference in costs is fairly small for example

    3 Is the pattern ‘market down, market down’ really robust?

    As you mention I wonder if this pattern is consistent across all markets and all time periods and whether it will persist in future. If it is why aren’t there participants out there exploiting the pattern and making gazillions. If you are even a ‘soft’ believer in market efficiency then shouldn’t that erode the pattern pretty quickly? Who knows, but perhaps we should persuade Monevator to join us in a novel Hedge fund strategy?!

  • 34 ivanopinion January 19, 2013, 10:35 am

    Maybe, as Richard says, the size of the moves might not be symmetrical. E.g., maybe the market only reverses direction 38% of the time, but maybe when it does the move is bigger than on the days when it follows the direction of the previous day. Otherwise, as PI says, you would expect such a phenomenon to be arbitraged away.

  • 35 ivanopinion January 19, 2013, 10:37 am

    If my suggestion is right, then it would mean this is not a way to make money, but it would still be a good way to choose which day would be better to be out of the market if you are switching funds. It will reduce your risk of missing a market upswing.

  • 36 Passive Investor January 19, 2013, 10:48 am

    @ivanopinion – Thanks i had missed Richard’s point about the assymetry of ‘up’ and ‘down’ market moves. I also agree with you that other things being equal it does make sense to aim to sell the day after a market fall.

    I plan to look at the IMA document which Snowman mentioned and I think you referred to.

  • 37 Passive Investor January 19, 2013, 11:30 am

    @ivanopinion @richard

    Just been thinking about ‘market down, market down’ sell strategy. I agree that you must both right about the asymmetry of ‘up’ and ‘down’ moves. ie There are more ‘down, down’ occurrences than ‘down,up’ ones, but the ‘up’ moves compensate by being bigger. This as you say would explain why the phenomenon hasn’t been arbitraged away.

    I initially agreed with @ivanopinion that it still makes sense to pick a ‘down, down’ pattern for a sale. On reflection, I think this may be wrong. If you followed the ‘down,down’ strategy you may be more likely to be out of the market during a fall. But there is a price to pay for this likelihood in the ‘extra’ losses you would suffer on the 30% or so occasions when you hit a ‘down,up’ pattern.

    Putting it another way if a 100 investors placed their fund sell orders using the ‘down,down’ strategy and a 100 investors followed ‘random’ or ‘anything but down,down’ strategies then the losses / gains of the two groups would be exactly the same I think. (Assuming your arbitrage argument is true.)

    On the basis that large losses (during an out-of -market-rise) are not adequate compensation for more frequent but smaller gains (during out-of-market-falls) it may I actually be preferable to just randomly sell.

  • 38 The Accumulator January 19, 2013, 11:42 am

    Richard is referring to Momentum. Momentum funds try to exploit it to earn extra returns.

    From what I’ve read, researchers believe it to be a behavioural anomaly that should be arbed away as people cotton on. It’s notoriously difficult to profit from.

    If you want to give if a go then delaying a sell (when the market is positive) or a buy (when the market is negative) is the way forward, but, um, the best of luck.

    Here’s a piece by Bernstein: http://www.efficientfrontier.com/ef/199/momentum.htm

    Larry Swedroe has also written extensively on it.

  • 39 ivanopinion January 19, 2013, 12:11 pm


    Yes, you are right (assuming it is correct that reversals are bigger than continuations).

    The best tactic is to avoid being out of the market, if possible.

  • 40 Passive Investor January 19, 2013, 1:19 pm

    @ivanopinion @the accumulator. I agree with you about the best tactic being to avoid being out of the market as much as possible and thanks for the William Bernstein link. Have a good weekend.

  • 41 ivanopinion January 24, 2013, 6:40 pm

    One other point to think about before you switch between index funds to get a lower TER is, of course, capital gains tax. Obviously, this is not an issue unless you have a big enough portfolio that you hold the index fund outside an ISA and you have held it for long enough (or it is big enough) to have made a capital gain of more than the £10,600 CGT annual allowance. If you are in a position where making the switch is going to trigger a taxable gain, you might prefer to switch your holding over several years, selling enough each year that you only trigger a gain that is sheltered by the allowance.

    This raises a question in my mind. If you switch to a different class of the same fund (eg, HSBC Retail to C class), does this trigger a gain for tax purposes, or is it treated as reinvestment in the same fund and therefore you just carry forward the original purchase cost? The same issue would arise with virtually any holdings at ATS, because they are compulsorily switching existing fund investments to clean versions of the same fund (unless the unclean AMC is lower, net of rebate, such as is the case with Aberdeen Asia Pacific). I assume this will not trigger a capital gain, otherwise they could land their clients with large capital gains tax bills.

  • 42 ivanopinion January 24, 2013, 7:02 pm

    I started to research the CGT point myself. It does not seem to be covered in the HMRC CGT manual, but I did find the following page relating to switching between income and accumulation units: http://www.hmrc.gov.uk/manuals/cgmanual/CG57755.htm

    Switching between different classes is treated as a reorganisation, which means that the switch is ignored and the new class is deemed to have been bought at the same price as the old class: http://www.hmrc.gov.uk/manuals/cgmanual/CG51700.htm

    I think it would make sense that no gain is triggered, because otherwise it would be an easy way to sidestep the anti-bed-and-breakfast rules.

    But I would appreciate if anyone can confirm.

  • 43 ivanopinion January 24, 2013, 7:59 pm

    Now I’m not so sure. HSBC seem to think a switch to a different class does trigger a gain: http://www.assetmanagement.hsbc.com/uk/attachments/advisers/rdr_faqs.pdf

    But Psigma say the opposite: http://www.google.co.uk/url?sa=t&rct=j&q=rdr+fund+conversion+cgt+hmrc&source=web&cd=3&ved=0CD4QFjAC&url=http%3A%2F%2Fwww.psigmaam.com%2FNews%2FPSigma%2520Unit%2520Conversion%2520and%2520Entry%2520Level%2520Changes%2520310812.pdf&ei=NH8BUfioOOGQ0AXDqIDQDA&usg=AFQjCNECLX3TrzwkqRIs19UZ350UVE3Itg&bvm=bv.41248874,d.d2k

    Cofunds seems to be saying that there is no CGT as long as you do a specific conversion through them, but the implication seems to be that if you sell the old class and buy the new class this is a switch not a conversion and CGT does apply:

  • 44 ivanopinion January 24, 2013, 8:17 pm

    This document seems to support Cofunds’ distinction of conversion (no gain) vs switching (gain):

    (see 2nd page)

    What a mess! Can anyone clarify?

  • 45 The Accumulator January 24, 2013, 9:48 pm

    Ivan great point about capital gains tax in comment 41. I’m going to amend the main post and credit you in a footnote. As for comments 42 – 44, I can only admire your bravery. Let us know how it turns out or if you end up seeking professional help – tax or psychiatric 😉

  • 46 ivanopinion January 29, 2013, 3:44 pm

    I can’t find much more on the tax position, and the situation is far from clear. My best guess is that if the platform or fund manager does a conversion to the new clean class of the same fund, this is ignored for CGT purposes (because it is considered a share reorganisation). But if the investor sells the old class and buys an equivalent amount of the clean class of the same fund, this is a disposal for CGT purposes. The sale is not matched against the purchase of the clean class, because the clean class is considered to be a different share than the old class, so the bed and breakfast matching rules do not apply. If I am right (and I might not be), then anyone making switches to clean classes should be very careful about inadvertently triggering a nasty CGT bill.

  • 47 SnowMan January 29, 2013, 5:33 pm


    The HSBC Global Investment Centre agree with you that outside of ISA switching creates a capital gain or loss and conversion doesn’t, based on these extracts from some of their FAQ, I’ve just copied the relevant bits of the answers. It’s hidden behind the log in so I can’t give a link.

    Q. Can I switch my existing investments held in a legacy share class to a new clean share class?
    A. Yes. You will be able to switch your existing investments in legacy share classes to the new clean share classes once new clean share classes are available for your chosen fund on GIC
    Also any gains made on sale of shares as part of such a switch may be liable for UK Capital Gains Tax (CGT) where your investments are held in a Funds Portfolio.

    If you are unsure whether switching would incur a Capital Gains Tax liability, you should seek advice from your tax consultant.

    Alternatively, you may wish to visit the HM Revenue and Customs webpage for Capital Gains Tax – http://www.hmrc.gov.uk/cgt.

    Q. Can I transfer legacy or clean share classes from other platforms into GIC?
    Before transferring to us you may wish to check with your existing provider whether they will allow you to convert legacy share classes to clean before transferring to GIC. If you are able to do this, this means that you can change your holdings to clean share classes as well as avoiding a potential loss of growth and/or income by being out of the market and the transfer will not constitute a disposal for Capital Gains Tax purposes. Conversion is not currently available with the Global Investment Centre.

  • 48 ivanopinion January 29, 2013, 6:38 pm

    Thanks, Snowman. That is the most explicit confirmation that I have yet seen.

    I presume that the compulsory switches that are being carried out by Alliance Trust Savings are conversions, though I am waiting for their confirmation. I am also waiting for confirmation from Interactive Investor whether they can do conversions.

    I predict that there will be a big fuss about this at some point, when the mainstream media catch on. I can just see the newspaper article, featuring Mr Williams from Coventry who thought he was being really clever to switch his portfolio of £100,000 in order to save 0.5% AMC, which is £500 per year. But he could not believe it when he received the letter from HMRC enquiring why he had not shown his capital gain of £30,000 on his tax return. “Mr Williams faces a wait of 17 years until his AMC savings have exceeded the capital gain.”

    It really makes no sense for a gain to be triggered just because you sell one class of a fund and purchase another class of the same fund. And it makes no sense to allow this easy way to bed-and-breakfast gains. We really need a change to the bed-and-breakfast rules to specify that they apply whenever you repurchase a different class of the same unit trust or OEIC.

  • 49 ivanopinion January 29, 2013, 7:38 pm

    Re the earlier discussion of tracking error, I just came across this interesting analysis in MSE: http://www.trustnet.com/News/381589/cheap-tracker-funds-thrash-expensive-rivals/1/

    HSBC comes out poorly, presumably because this is a 10 year analysis and it only reduced its AMC relatively recently. Vanguard is not included because it does not have a ten-year record. But the article makes clear just how big an effect costs and tracking error can have, judging by the absolutely appalling performance by the Halifax trackers.

  • 50 ivanopinion February 1, 2013, 2:38 pm

    Interactive Investor told me they can’t do conversions. This could be a big drawback for an investor who wants to switch to the new clean class of a fund, but would trigger an unacceptably large capital gain if they have to sell and then buy the new class. You might be obliged to stick with the old class even though it was costing you extra AMC each year.

    I wonder what the position is with TDD and BestInvest? As far as I know, Hargreaves Lansdown are not yet offering clean classes of active funds.

  • 51 ivanopinion February 1, 2013, 5:43 pm

    ATS has confirmed they will be using conversions and they are satisfied this will not trigger CGT.

  • 52 ivanopinion April 22, 2013, 9:51 am

    There is now a categoric and explicit answer to the question of whether switching from one class of a fund to another class of the same fund can trigger a capital gain:

    The short answer is that it normally will, but there is a new rule coming in May, which will help, provided your platform is willing to assist.

  • 53 The Investor April 22, 2013, 1:12 pm

    Great stuff ivanopinion, thanks for circling back with us on this. Possibly worth an entire new post.

  • 54 ivanopinion April 22, 2013, 4:23 pm

    Yes, perhaps it would be worth highlighting, given the interaction with the announcement that commission rebates are taxable from the beginning of this tax year. Up till that point, clean funds were not necessarily any cheaper than dirty funds with a decent rebate. In fact, in some cases the clean fund was more expensive.

    For instance, Fidelity and Invesco Perpetual both have “clean” funds with AMCs of 1%, because they are still paying platform commission and including it in the AMC. But with the right platform, the dirty fund class had a rebate of 0.64%, which meant that the net AMC was 0.86%. Which is cheaper than the so-called clean class. If the rebate is taxable, a higher rate taxpayer will have a net rebate after-tax of only 0.38%, so the net AMC is 1.12%, so the (semi) clean class is cheaper.

    So, this is going to give a very strong push to switch existing investments to clean classes, but anyone who thinks they can DIY this switch could walk into a nasty CGT trap.

  • 55 John B August 2, 2016, 8:53 am

    Lots of discussion about being out of the market, and CGT, but the two points weren’t clearly linked. The key thing is that if HMRC consider you to be bed and breakfasting by in-fund switches, and so disallow your use of an annual CGT allowance, you need to be out of the market for a month before returning. But if you are are switching between different funds tracking the same index, say the FTSE 100, you can do the change on the same day. If your yearly transactions exceed 4*CGT allowance, so £44400, you need to declare them on a tax return, whether there is CGT payable or not, and of course when there is a gain over £11100, and the 10% tax is payable. Calculating CGT on funds with lots of small investments is horrid, BTW.

  • 56 PinchThePennies August 2, 2016, 6:26 pm

    For me one of the main points over whether to choose ETF’s or Funds has so far been the fact that AJ Bell Youinvest charges an additional funds charge of 0.22% of the value of each fund held per annum – whereas I can buy the ETF’s I want to purchase without having to pay such an additional holding charge. So far ETF’s are winning.

  • 57 John B August 2, 2016, 9:39 pm

    I have my HL pension in ETFs and my ISA/unprotected funds with I -web for the same reason

  • 58 Hariseldon August 2, 2016, 9:52 pm

    A couple of points to consider when swapping funds for lower costs.
    First is that when you look at the index for an overseas index tracker , eg S&P 500 the index may be a net tracker , that allows for with holding taxes on dividends , for the S&P 500 the index assumes a 30% withholding tax on dividends against the 15% you wil pay, thus for a low charging tracker with a .07% TER you should expect a positive tracking error.

    I recently held a Canadian tracker and found the iShares with .48% ETF tracker outperformed by a noticeable amount, over multiple years other apparently lower charging trackers.

    IShares , Vanguard and State Street in general are ‘investor’ friendly and have lower hidden costs.

  • 59 ivanopinion August 3, 2016, 10:35 am

    “But if you are are switching between different funds tracking the same index, say the FTSE 100, you can do the change on the same day.”

    Yes, if you want to trigger a capital gain and use your CGT allowance. The same is true if you switch between different classes of the same fund, as they are not the “same share” under the bed and breakfast rules. (That’s if you do your own switch by selling the old class and buying the new. If the fund manager just exchanges one class for another (which means you are not out of the market at all), that’s a share reorganisation, so no capital gain is triggered.)

  • 60 john August 3, 2016, 10:36 am

    If you’re anything like me, the feeling of knowing there’s a better fund than the one you’ve got is completely unbearable. In my case it’s worth being a small net-loser just to be able to look at my portfolio and see the cheapest funds.

  • 61 TomB August 3, 2016, 12:49 pm

    Sorry, but to me this analysis is completely missing the optimal scenario.

    If I had £10,000 in a tracker fund on 0.2%, I would not take the risk in switching it – plus the fund switching costs that you’ve also ignored.

    Instead I could just flip my future payments into the cheaper vechicle. No investment risk, no transaction costs plus I’ve gained the vast majority of the return benefit that your method tries to capture. It also doesn’t rely on such a long 20 year time horizon for payback.

    You also have the added advantage that if the new product doesn’t track well you haven’t put all your eggs into that basket…

  • 62 The Investor August 3, 2016, 1:49 pm

    @TomB — There are no switching/transaction costs with the index funds under discussion.

  • 63 PinchThePennies August 3, 2016, 5:02 pm

    @Tom, post 61,

    Yes, you could just stop paying into the fund with the higher fee which you already hold (lets call it Fund A) and add the new fund with the lower fee (let’s cll it Fund B) for all future payments however I don’t think that this will save you money. Instead you are adding more expenses to be paid because Fund A will still charge you and you now also have to pay Fund B.

    If, on the other hand, you were to switch all money out of Fund A into Fund B then there might well be a cost for doing so right now for you (and additional risk while you’re out of the market). However, as you are still putting your future money into Fund B then there will be a crossover point sometime in the future when the combined costs of switching will be recouped.

    As for tracking error – this risk is always present.

    Regards, Pinch

  • 64 WestCountryEscapee August 5, 2016, 2:29 pm

    I’ve been looking at a similar exercise in my Sippdeal pension but with regard to fund charges.

    I’ve got the TER’s all right down via migrating to Vanguard funds, but I’m still paying £200/year in fees as three of the funds are OEIC’s – Global Bond, UK All Share and ex-UK Dev. World respectively.

    I could save this by moving out of these funds but there are no direct ETF equivalents so I would then lose the ability to allocate to these sectors.

    Also, as the £200 is the limit in percentage terms this will go down over time as I buy more units but I still don’t like the idea of throwing away £200 every year.

    Any suggestions? I could replace the UK one with FTSE100 and/or FTSE250/350 but unless I replace all three I’m likely to be still charged the £200 or a big chunk of it…

  • 65 PinchThePennies August 5, 2016, 9:31 pm

    @WestCountryEscapee, post 64

    Hi WCE,
    How about this:

    The link takes you to the country split of VWRL.


    I think that in order to simulate ex-UK Dev. World with Vanguard ETF’s you could buy VWRL and then see which of the other ETF’s Vanguard offers you would need to buy in order to reduce the amount of UK you’re holding via VWRL. It’s not perfect as you’re still holding UK but it get’s you out of the fund.

    The UK All-Share is easier to replace: FTSE100 + FTSE 250 ETF from Vanguard plus an iShares ETF ( iShares MSCI UK Small Cap UCITS ETF )

    or maybe one of these

    Lyxor UCITS ETF FTSE All Share GBP
    db x-trackers FTSE All-Share UCITS ETF (DR) 1D

    As for the Global Bonds – have a look here:

    If you are open to other providers aside from Vanguard then I think it would be good to have a look at http://www.justetf.com or http://etfdb.com/screener/ and see what comes up during a search there.

    Regards, Pinch
    (Disclosure: I only hold VHYL from Vanguard and do not hold any other ETF currently. I have not looked at any of the usual ratios (OCF, size, yield etc. for any ETF mentioned above.)

  • 66 WestCountryEscapee August 8, 2016, 8:59 am

    Thanks for that. The FTSE All Share and Global Bond come up with alternatives on the screener, although the latter does not seem to be hedged as it is with the current fund – my understanding is that this prevents the value bouncing around if the pound changes but I guess in the long term is not such an issue?
    With VWRL I would need to also buy all the non-UK developed market ETF’s which sounds a bit complicated and the additional purchase (all my funds are currently available on the £1.50 AJ Bell monthly purchase list) and rebalancing costs might well equal the fund charges for the ex-UK fund.
    I’m not quite sure it’s worth paying just to maintain the luxury of my simple UK/ex-UK split, but at the moment I don’t really want to tinker with my initial asset allocation just to lower the fees.
    Here’s hoping Vanguard get some more ETF’s out there – such as making their US global bond ETF available in the UK!

  • 67 PinchThePennies August 8, 2016, 12:18 pm

    Yes, it is a bit onerous to buy all the other ETF’s in addition to VWRL just to minimise the percentage of UK you’re holding within it. And I’d say that as VWRL covers more than 90% of the global stock market it stands to reason that you probably don’t need to. I certainly wouldn’t do this. Have a look for articles by Lars Kroijer like this one here (http://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/). – I think he makes a good case for it.

    Without knowing anything else about your uk/ex-UK split or your initial asset allocation … anything I can say to you is therefore going to be incomplete.

    How about this:
    – Buy VWRL as your main holding – immediately no need to any longer also trying to cover FTSE A-S which then only leaves the Global Bonds to be replaced
    – As for the hedged bonds … how about this:
    a) buy a global bond which is not hedged and be done with it or
    b) try to achieve the hedging effect by buying a number of global bonds in a range of currencies all of which are unhedged in themself. Is this as elegant an option as buying just 1 fund/ETF? Of course not but it gets you out of the fund (and related costs) which I understand is your goal.

    As for rebalancing: I think that can be done in just a few steps:

    1) Set your ratio of stocks/shares vs. bonds
    2) Set your rebalancing frequency (monthly, quarterly, every 6 months, annually…) to suit your circumstances.
    3) Set trigger points for when to rebalance, i.e. rebalance when the ratio of either part goes over x% up or x% below the target ratio you set in step 1
    4) At each rebalancing date have a look at whether the trigger points have been passed. If they have been passed – rebalance. If they have not been passed – you’re done for this time, come back at the next rebalancing date.

    That’s quick and easy to do in probably 10 minutes tops if you have only 2 holdings, i.e. VWRL + 1 Global Bond ETF. If you’re holding more than one bond ETF then it may take a bit longer to work this out but not much longer.

    Regards, Pinch

  • 68 PinchThePennies August 8, 2016, 12:45 pm

    Sorry, completely forgot to mention this:

    The Investors Chronicle is doing a review of ETF’s it deems to be the Top 50 ETF’s once a year – they started doing this in 2014.

    This year’s article came online on 27/05.

    1) Go to: http://www.investorschronicle.co.uk/
    2) Go to the Fund & ETFs tab and it should be on the dropdown menu

    Not sure if you need a subscription to access either the article or the full list though.

    Regards, Pinch

  • 69 WestCountryEscapee August 8, 2016, 1:19 pm


    Thanks – I set up my portfolio at 40% UK; 30% ex-UK (split 15% ex-UK and 15% EM); 20% Gilts and 10% property.

    It seems to be doing quite well and I did read the Lars Kroijer article: it’s quite convincing and hard to argue against, particularly with a few global bonds thrown in.

    As it’s my SIPP I’ve got it all set up to rebalance via each monthly top-up so no need for any triggers and the contributions are big enough to cover the costs.

    If I was starting again, I’d probably follow what I’ve done for my wife’s portfolio and invest the lot in Vanguard LS80, which is pretty close to what I’ve got…

  • 70 WestCountryEscapee August 8, 2016, 1:34 pm

    PS The Gilts are 15% UK, 5% worldwide

  • 71 The Investor August 8, 2016, 1:45 pm

    @WCE — Just for future clarity, only UK government bonds are called Gilts. Other countries have their own names for their government bond — e.g. US government bonds are called Treasuries, German government bonds are called Bunds, etc.

    Might help ward off confusion some day in the future. 🙂

  • 72 PinchThePennies August 8, 2016, 4:53 pm

    @WestCountryEscapee, post 69

    Now there’s a thought! How about then cashing the lot in and plonking all and everything into Vanguard LS80 as soon as is viable?

    This initial and all further purchases can be set up on the regular investment facility for £1.50 commission. No need to rebalance (or even think about it) as there’s only 1 holding anyway.

    The initial hit on dealing charges will be evened out over time due to only one holding to be purchased each month.

    Regards, Pinch

  • 73 Kraggash August 12, 2016, 11:45 am

    See recent Youninvest charge increases for extra incentive to change ro ETFs. I have been looking for the simplest way to replicate Vanguard LS80 with ETFs

  • 74 WestCountryEscapee August 15, 2016, 2:49 pm

    Yes, got the email from Youinvest just after my posts above. The charges for a mixed ETF/OEIC portfolio have jumped enormously and as you say, there is now much more incentive to move to ETF’s…
    Details here:

  • 75 WestCountryEscapee August 19, 2016, 11:12 am

    @Kraggash and @PennyPincher

    Thanks for your input. After reviewing the YouInvest charges it looks like I’ll be switching from:

    – Vanguard Global Bond into the equivalent iShares ETF (SGLO)
    – Vanguard All Share into the SPDR ETF (FTAL)
    – Vanguard ex-UK into the iShares ETF (XDEX)

    I’ll arrange the sale of the Vanguard funds at the start of Sept. and purchase the ETF’s (rebalancing as I do so) in the regular investment on the 10th.

    [Apologies for the excessive comments but I thought others might be interested. ]

  • 76 Kraggash August 19, 2016, 11:50 am

    XDEX (db x-trackers rather than iShares) has a TER 0f 0.4%, whereas Vanguard Dev World ex-UK has a TER of 0.15%, so are you saving anything there?

  • 77 WestCountryEscapee August 19, 2016, 12:09 pm


    Fair point – some of the TER’s are a bit higher and I was comparing this to the old (?) TER of 0.29% for the Vanguard fund.

    This is still no worse though as I would be paying the 0.25% platform fee for the Vanguard vs. the 0.24% increased TER for the ETF.

    Also, the ETF’s are eligible for the £1.50 monthly purchase plan which makes them less expensive than others that might have lower TER’s but are not.

  • 78 WestCountryEscapee August 19, 2016, 12:24 pm

    PS Yes – based on the 0.15% probably worth leaving the Vanguard ex-UK where it is but keeping a careful eye on the YouInvest charges.

  • 79 ivanopinion August 19, 2016, 1:05 pm

    Just a reminder that you can (I think) buy Vanguard LS funds direct from Vanguard, if you hold more than £100k of the fund. No platform charges or dealing charges at all, AFAIK. I don’t think they do ISAs or SIPPs, so only of help if you have a big unwrapped investment.

    Even if you don’t currently have more than £100k in a single LS fund, you might find that if you combine several of your existing funds they have a similar overall exposure to a LS fund.

  • 80 PinchThePennies August 20, 2016, 12:57 am

    @Kraggash, post 73
    Have a look at the Allocation to underlying Vanguard funds and you will find that it already contains 3 Vanguard ETF’s so you need to replace only 11 holdings.


    I had a very brief look and it seems as if you could replace 5 holdings like-for-like(~ish) from Vanguard.

    Vanguard LS80 ETF replacement
    FTSE Dev Europe ex-U.K. Equity Index Fund VERX
    Emerging Markets Stock Index Fund VFEM
    Japan Stock Index Fund VJPN
    U.K. Government Bond Index Fund VGOV?
    Pacific ex-Japan Stock Index Fund VAPX

    For the below holdings I have not been able to find an exact replacement on Vanguard UK:
    FTSE Developed World ex-U.K. Equity Index Fund
    U.S. Equity Index Fund
    FTSE U.K. All Share Index Unit Trust
    Global Bond Index Fund
    U.K. Inflation-Linked Gilt Index Fund
    U.K. Investment Grade Bond Index Fund

    Maybe the screeners on these 2 sites can help you.


    Regards, Pinch

  • 81 PinchThePennies August 20, 2016, 1:44 am

    That didn’t work out, did it?

    Here’s the list again:

    LS80: FTSE Dev Europe ex-U.K. Equity Index Fund
    LS80: Emerging Markets Stock Index Fund
    LS80: Japan Stock Index Fund
    LS80: U.K. Government Bond Index Fund
    LS80: Pacific ex-Japan Stock Index Fund

  • 82 Kraggash August 21, 2016, 11:18 am


    But 11 funds to replace one? Ouch. Lots of rebalancing required.


  • 83 PinchThePennies August 22, 2016, 1:56 am

    @Kraggash, post 82,
    Yes, it is a bit of work – however LS80 is invested into 11 underlying funds as can be seen following the link in post 80 above. And if you wanted to replace these funds like-for-like then you may have to bite the bullet on this one.

    However, there’s another way of replacing LS80 with just 2 holdings both of which would be ETF’s.

    Use http://www.justetf.com or http://etfdb.com/screener/ to find a World ETF and a Global Bond ETF you are happy with (provider, cost, size etc.).

    – Work out the 80:20 balance between the 2 ETF’s.
    – Purchase both ETF’s.
    – Rebalance once a year or so.

  • 84 ivanopinion August 22, 2016, 5:35 pm


    LS80 is heavily overweight in UK equities and bonds. About 25% UK, which is about 4-5 times the size of the UK market as a share of world markets. Presumably, Vanguard think that’s what a UK investor would want.

    So, if you want to replicate LS80, you would need to add another two ETFs to bump up the UK exposure. Even so, 4 ETFs is a lot less than 11. But perhaps on reflection some investors would not want to be overweight on UK, so 2 ETFs will do it.

    Makes you wonder why Vanguard felt the need for 11. Perhaps they wanted to fine-tune the exposure to other regions (I haven’t looked to see if the other regional exposures are different from the market weights)? But why would they do that?

  • 85 Kraggash August 22, 2016, 6:03 pm

    Yes it is interesting isn’t it? Why include an all-FTSE ETF and also a FTSE 100 ETF, to boost large UK company exposure by an additional 1.8%?

    I will probably switch to the plain Global ETF and Bond combination. I am overweight UK elsewhere anyway.



  • 86 PinchThePennies August 23, 2016, 4:54 am

    Yes, the other weightings between LS80 and VWRL are different as well.

    As for Vanguard’s reason of the composition and %ages in LS80 – don’t know why they did it like that.

    How about you ask them and share the answer you get?

    Regards, Pinch

  • 87 Kraggash August 23, 2016, 9:05 am

    The LS series are funds that use trackers to gain exposure to the markets, rather than being trackers themselves. This implies a level of ‘active management;, at least in the initial composition. I do not think they are committed to keeping the % constant over time either.

  • 88 PinchThePennies August 23, 2016, 2:40 pm

    My guess would be that as long as the general 80:20 split is maintained that there is wiggle room between the underlying holdings to move around a bit.

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