Index along with exchange-traded funds are increasingly becoming popular despite its high-costing platform fees.
With the new Isa (Nisa) rules in place, investors are looking at new ways to get the most of their money out of the newly implemented £15,000 annual allowance. While the performance of investments is primarily the key and the low-cost tracking option will miss out on a chance in some markets, keeping a lid on costs should not be taken lightly.
It’s something many experts of the field are acutely aware of, in a recent letter which revealed an investment advice that recommended putting 90 % in very low-cost S&P 500 index fund.
Calculations and valuations from Morningstar have shown that £10,000 investment in a tracker fund with a total expense ratio of 0.3 % (presuming that there is a 10 % annual return) would grow to £160,000 in the span of three decades. A fund with an expense ratio of 1.65 %, however, would tantamount to £107,000 over the same period. The question therefore is what are the possible option available to provide investors equal chances of not losing overpriced fees?
Tracker and ETFs
Index funds are relatively easy to hold at 0.1 % upwards and fairly good in providing good diversification for most investors as the best starting point. Figures from the Investment Management Association reveal that sales of index tracker funds which aim to passively imitate the returns of a market or index rather than simply actively picking winners, reached a record of £3 billion last year which means that they are now accounting more than £74.2billion worth of assets under management in the U.K., which is roughly 10 % of the total.
The effects of the new regulation have seen already the low cost trail even further. Fidelity, Legal and General as well as similar other have slashed costs on their index tracker this year. Fidelity’s new range recently launched last March started at 0.09 % on an ongoing charge basis while Adam Laird of Hargreaves Lansdown charged 0.1 % respectively.
Aside from the conventional trackers, another popular option is exchange-traded funds (ETFs), which are floated on a stock exchange and traded like shares. Barclays Stockbrokers says the value of the ETF assets are held by its clients has drastically increased by a staggering 108 % since 2010, while 52 % of its ETF investors hold them in an Isa.
In some cases, the absolute administrator or management fees are comparatively cheaper – Blackrock’s iShares S&P 500 charges approximately 0.07 % per year and Shaun Port Nutmeg disputes that ETFs are regarded as far better at tracking market indices. The cheapest U.K. index tracker fund lagged the index by 0.5 % last year.
The broader reach of the ETFs basically means that investors can inexpensively play market themes that are not easily accessed through non-ETF trackers. Investors who bought reasonably priced ETFs in anticipation on India’s recent stock market rebound, for example, have been gratuitously rewarded for the risk they took. However, analysts sill recommend taking a much closer look at the dealing charges on ETFs. These fees can potentially expedite the adding up of a feasible drip-feed strategy. If traders are feeding around £250 in each month, and there’s a £25 dealing charge respectively, this would be conclusive of a 10 % charge.