≡ Menu

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 []

Receive my articles for free in your inbox. Type your email and press submit:

{ 88 comments… add one }
  • 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.

Leave a Comment