The three cheapest FTSE 100 tracker funds are also the three top-performing ones over the last decade, while the opposite is true of the three most expensive.
With the exception of the L&G UK Index fund, the trend is the same with FTSE All Share trackers.
Performance and cost of FTSE 100 trackers
| Name | 10-yr returns (%) | TER (%) |
|---|---|---|
| FTSE 100 | 97.39 | N/A |
| Santander - Stockmarket 100 Tracker Growth | 94.26 | 0.35 |
| Liontrust - FTSE 100 Tracker | 92.83 | 0.46 |
| HSBC - FTSE 100 Index | 83.84 | 0.27 |
| Cler Med - FTSE 100 Tracker | 80.75 | 1 |
| Royal Bank of Scot - FTSE 100 Tracker | 80.35 | 1 |
| Marks & Spencer - UK 100 Companies | 80 | 1.03 |
| Halifax - UK FTSE 100 Index Tracking | 56.25 | 1.52 |
Source: FE Analytics
The standout FTSE 100 tracker over the 10-year period is Santander Stockmarket 100 Tracker Growth, which has delivered 94.26 per cent – around 4 percentage points less than the FTSE 100.
It is the second-cheapest tracker of its kind, behind the HSBC FTSE 100 Index. Royal Bank of Scot FTSE 100 Tracker actually has a lower tracking error than the Santander product, but its significantly higher TER has dragged down performance.
Performance and cost of FTSE All Share trackers
| Name | 10-yr returns (%) | TER (%) |
|---|---|---|
| FTSE All Share | 116.66 | N/A |
| F&C FTSE All Share Tracker | 106.92 | 0.43 |
| L&G UK Index | 103.9 | 0.56 |
| Fidelity Moneybuilder UK Index | 103.41 | 0.3 |
| HSBC FTSE All Share Index | 103.04 | 0.27 |
| Allianz UK Index | 102.51 | 0.7 |
| Virgin UK Index Tracking | 99.38 | 1 |
| Aviva Inv UK Index Tracking | 92.82 | 0.92 |
| Halifax UK FTSE All Share Index Tracker | 72.58 | 1.5 |
Source: FE Analytics
F&C FTSE All Share Tracker is the best performer of all the FTSE All Share passive funds, with returns of 106.92 per cent.
Again, it does not have the lowest tracking error of the group, but its lower charges have meant it has outperformed the likes of Aviva Inv UK Index Tracking and Virgin UK Index Tracking.
In both cases, the bottom of the table is dominated by funds run by Halifax. Halifax UK FTSE 100 Index Tracking and Halifax UK FTSE All Share Index Tracker are not only the worst performers by some distance, but they are also by far the most expensive.
The £986m FTSE 100 vehicle has fallen short of its index by 45.35 per cent over the last decade. It has a TER of 1.52 per cent – higher than the average actively managed retail portfolio in the IMA UK All Companies sector.
Performance of fund vs index over 10-yrs
Source: FE Analytics
An investment of £1,000 in this tracker 10 years ago would now be worth £1,563. If it had replicated the FTSE 100 exactly, the lump sum would be worth £2,167.
The Halifax UK FTSE All Share Index Tracker has £1.7bn in assets under management (AUM).
Rob Gleeson, head of FE research, says there is no excuse for a tracker to charge a fee this high.
"This is pretty inexcusable to be honest," he commented. "To charge 1.5 per cent and more to track a market that poorly is outrageous, particularly when you compare their performance to a group like Vanguard, which has next to no tracking error and low charges."
"Cost is clearly important when it comes to tracking, but how closely it tracks the index also has a big impact. You’d expect a more expensive fund to replicate the market more accurately, but many funds – including this one – also have a high tracking error."
"The problem is that this fund will continue to have a lot of money in it, because a lot of the investors in the fund won’t be actively monitoring their portfolios, and may not even know they hold the tracker in the first place," he added.
According to FE data, Halifax UK FTSE 100 Index Tracking has a tracking error of 7.62 per cent over 10 years. While this is not the highest figure of the funds tracking the FTSE 100, Gleeson says it is still too high.
"The UK tracker market has been pretty lazy in general to be honest. The products were mostly being bought by life and pensions companies."
"It has taken the increased popularity of ETFs and the introduction of new groups from overseas like Vanguard to finally see these products given a higher level of scrutiny."
A spokesperson for Lloyds Banking Group, which oversees the running of the portfolio, says the tracker’s above average fees are fully justified.
“Normally with these types of funds, the cost of advice can be anything between 3-5 per cent as an upfront charge to the fund,” the spokesperson said. “In this case there is no upfront charge to the fund which is a benefit to the customer and instead the cost of advice is spread over time through an increased annual management charge to the fund.”
“This therefore means that the charging shape is different, rather than it simply being more expensive. We have however decided to reduce the annual management charge which is now capped at 1 per cent on these funds. The reduction came into effect in October 2012.”
The spokesperson claims that the fund’s performance is actually very competitive, and rejects claims that its tracking error is high.
“To invest in any index requires some sort of fee and we should not confuse charges with tracking error,” the spokesperson said. “Long time periods tend to produce big numbers that are hard to interpret.”
“When we breakdown the performance year on year then the difference is actually very small. Some tracking error should always be expected irrespective of the approach of the provider. SWIP is currently running these funds to a low tracking error and their recent performance over five years has been in line with the index, gross of charges.”
Gleeson points to the Vanguard FTSE UK All Share Index fund as a good option for investors looking to get passive exposure to the UK market.
According to FE data, it has returned 21.79 per cent since its launch in December 2009 – just 0.53 per cent less than the All Share.
The two worst-performing portfolios over this period, Halifax UK FTSE All Share Tracker and Aviva Inv UK Index Tracking, have returned 17.98 and 16.91 per cent respectively.
Performance of funds and index since Dec 2009
Source: FE Analytics
Vanguard FTSE UK All Share Index has by far the lowest tracking error of all the All Share trackers over the period, at just 0.4 per cent.
Virgin UK Index Tracking is second with 2.78 per cent, while Halifax UK FTSE All Share Index Tracker has a tracking error of 7.32 per cent over the period.
The £927m Vanguard fund has a TER of 0.15, making it by far the cheapest All Share tracker in the IMA universe. It has a minimum investment of £100,000, but can be bought for a far smaller lump sum through numerous platforms.