The cheapest ways to track global stock markets

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Tracker or passive funds, which blindly follow the up and down movements of a stock market, have been selling like hot cakes over the past couple of years.

Lower costs, with some tracker funds charging less than 0.1 per cent versus typically around 0.9 per cent for an active fund, is a key attraction.

Simplicity is another: investors - particularly those who are younger - favour the certainty offered by a fund that will do what it says on the tin.

With active funds, in contrast, investors hope the manager outperforms the index and various academic studies that have shed a poor light on active funds' ability to add value.

Here Money Observer rounds-up the cheapest ways passive investors can track various markets.

UK

Active funds find it tough to outperform in mature, well-documented markets such as the UK, and many investors will feel much more comfortable with a low-cost index-tracking fund.

In that case, suggests Danny Cox, head of research at financial adviser Hargreaves Lansdown, two Legal & General funds are a good option, depending on whether you want to focus narrowly on blue chips or more broadly.

'L&G UK Index is a FTSE All Share tracker and an ideal low-cost way to gain exposure to the wider UK market, with an ongoing charge of just 0.1 per cent, or even lower with some investment platforms,' he says.

'Or, for a FTSE 100 tracker, the Legal & General UK 100 Index fund is a good option.' The latter fund carries the same 0.1 per cent ongoing charge figure (OCF).

For those looking for a slightly more active approach, so-called smart beta funds may be worth considering. These track an index created to include stocks that meet certain criteria, often around yield or value.

'One to consider would be iShares UK Dividend UCITS ETF,' says Martin Bamford, managing director of financial adviser Informed Choice.

'This invests in a higher-yielding sub-set of the FTSE 350 index, with direct investment in 50 different UK companies.'

Another option in the smart beta camp is the db X-Trackers FTSE 100 Equal Weight Ucits ETF. This fund buys every company in the FTSE 100 index, but takes an equal stake in each, rather than following the weightings that usually apply.

The effect is to give investors more exposure to the smaller businesses in the blue-chip index and to prevent over-exposure to industries such as financial services, which dominate weighted index funds.

Uncertainty rules for UK market in 2017

GLOBAL

In the global arena, low cost options include the Legal & General International Index Trust, which has an OCF of 0.13 per cent.

There's also the Vanguard FTSE Developed World ETF, priced at 0.18 per cent, while the Vanguard FTSE Developed World ex-UK Equity Index, which costs 0.15 per cent, excludes UK shares.

US

The Vanguard S&P 500 Ucits ETF tracks the S&P 500 index, the premier measure for US stocks, and has a very low 0.05 per cent ongoing charges figure (OCF).

The Legal & General US Index Trust is a unit trust that aims to mirror the performance of the FTSE USA index and has an OCF of 0.1 per cent.

The SPDR Russell 2000 US Small Cap ETF tracks the small-cap index - a sector which could do better as president-elect Donald Trump's policies stimulate the domestic economy. Its OCF is 0.3 per cent.

EUROPE

The iShares Core Euro Stoxx 50 is an exchange traded fund (ETF) tracking the 50 largest eurozone companies, many of which will be multinationals. Its ongoing charge (OCF) is just 0.1 per cent.

iShares also offers a Value ETF, iShares Edge MSCI Europe Value Factor UCITS ETF, which chimes with expectations that this area will come to the fore once again. Its OCF is 0.25 per cent.

Fidelity Index Europe is an Oeic - open-ended investment company - tracking the broader MSCI Europe ex UK index, which includes mid-caps as well as large companies among its 335 constituents. Its OCF is 0.12 per cent.

JAPAN

HSBC MSCI Japan ETF tracks the MSCI Japan index and has an OCF of 0.19 per cent. The Blackrock Japan Equity Tracker follows the FTSE Japan Index and has an OCF of 0.21 per cent.

iShares offers a small cap ETF, iShares MSCI Japan Small Cap UCITS ETF, which should give more domestic exposure and has an OCF of 0.58 per cent.

ASIA PACIFIC EX JAPAN

Passive funds invested in the region tend to underperform active funds, due to the esoteric nature of the markets.

Those interested in passives, however, might consider the BlackRock Pacific ex Japan Equity Tracker, with an ongoing charges figure (OCF) of 0.19 per cent.

This fund mainly invests in large and mid-cap Australian and South Korean equities. The Fidelity Index Pacific ex Japan has a lower OCF of 0.15 per cent.

EMERGING MARKETS

Passive funds are not ideal for the diversity of emerging markets. Most will be heavily exposed to China and Asia, due to the weighting of the MSCI Emerging Market index. But there are various options.

Tracker fund BlackRock Emerging Markets Equity Tracker has outperformed the IA Global Emerging Markets sector over the year. Its largest regional exposure of 26 per cent is in China and it has an OCF of 0.25 per cent.

Alternatively, the Vanguard Emerging Markets Stock Index, with an OCF of 0.27 per cent, returned 30.3 per cent over the year to 1 December.

To reduce the inherent volatility of the region, you could look at the iShares MSCI Emerging Markets Minimum Volatility ETF, with an OCF of 0.25 per cent.


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