The growth in popularity of index trackers became more evident last week with the announcement from wealth manager Hargreaves Lansdown that some would be included in its Wealth 150+ list.
The Wealth 150+ list contains the top funds that Hargreaves believes offer the best combination of first class performance and low management charges. Historically the list included Hargreaves’ top rated active funds – with passive trackers appearing on its separate Core Tracker List. The move to include trackers on the Wealth 150+ list is made in recognition of their popularity with Hargreaves’ customers and the fact that these passive funds are here to stay. Having both types of fund on the same list will make it easier for customers to compare active and passive funds.
Research Director Mark Dampier says the percentage of Hargreaves’ clients now investing money in a tracker fund has grown from 6.1% to 11.2%, over the last five years. He predicts that going forward, the UK funds market will be made up of high quality active funds and low-cost passive funds – both of which can offer real value. The middle ground ‘closet’ trackers which simply track an index but still charge the same fees that investors would pay for an active fund manager, will be squeezed out.
There are currently 13 trackers on the Wealth 150+ including the Legal & General US Index, the Legal & General UK FTSE 100 Index Fund and the Legal & General UK FTSE All Share Index Fund. With these three funds, Hargreaves has been able to utilise its exceptional bargaining power to drive down annual management charges from 0.1% to 0.06%. Hargreaves has made similar deals for the other 11 funds on the list. However, this must be considered against Hargreaves’ relatively high annual charge that investors must pay to use its Vantage Platform. This is 0.45% for the first £250,000. The key to successfully investing in trackers is to work out the total cost of holding the fund. This includes platform charges, fund charges and any other charges you may encounter. You then need to use the platform that gives you the best deal overall. If Hargreaves’ fees seem expensive, exchange-traded funds (ETFs) are worth considering – these work like a tracker and have low annual charges, but they are technically shares. You can use an ETF to track the performance of a particular index – such as the FTSE 100 or S&P 500 – giving you easy access to a whole sector or market and instant diversification.
The trackers on the Wealth 150+ don’t just offer the opportunity for UK and US investment – they also give investors potential exposure to Japan, Europe and emerging markets – together with corporate bonds and government stocks. However, it’s worth noting that the funds selected come from just three investment managers – HSBC, L & G, and BlackRock. Investors should consider other investment groups with very low costs before making their choice. It is likely that Hargreaves has only included funds from a limited range of investment managers because they were unable to negotiate lower charges with other managers.