Arguably the best answer, though it won’t be popular with those staunchly on opposite sides of the fence, is a blended approach. Many experts keep their core holdings in cheaper passive funds and make active bets in areas where they have more conviction.Depending on your view of the markets, trackers have been the better place to be this year. Since the start of 2014, trackers have outperformed the majority of their actively managed rivals across the UK sectors, thanks largely to the latter’s overweights in small and mid-caps.
For those keen to make the most of the £15,000 ISA limit with cheap and easy trackers, here are five that matched the performance of their chosen index very closely in recent years.
UK
The Vanguard FTSE UK All Share Index has the lowest tracking error of any fund in the IMA UK All Companies sector over the last three years – just 0.04 per cent, relative to its All Share benchmark.
Like all good trackers, the fund replicates the make-up of its benchmark, changing the weightings of companies depending on how they perform. As you’d expect, the largest holdings at the moment are giants HSBC, Royal Dutch Shell and British American Tobacco.
Since the start of the year, the tracker is up 1.42 per cent, in line with the FTSE All Share, and ahead of its peers in the IMA UK All Companies sector, which gained just 0.42 per cent.
Year-to-date performance of fund vs sector and index
Source: FE Analytics
More importantly, the fund has delivered index hugging returns over the longer-term. FE data shows that its returned 53.43 per cent since its launch in December 2009 – less than a percentage points less than the All Share.
Across its entire fund range, Vanguard levies extremely low ongoing charges. The FTSE UK All Share Index tracker has ongoing charges of just 0.15 per cent, which has helped it to deliver returns in line with its benchmark.
Fans of equity income may be tempted by the group’s FTSE UK Equity Income Index tracker, which is currently yielding just under 4 per cent.
Europe
Over the last three years, the fund with the lowest tracking error in the IMA Europe ex UK sector is another run by Vanguard – the FTSE Developed Europe ex UK Equity Tracker.
The fund, which tracks the FTSE Developed Europe ex UK index, has a 2.16 per cent yield and levies low ongoing charges of just 0.25 per cent.
Over its history, the fund has tracked its index very effectively, and performed broadly in line with the IMA Europe ex UK sector average. This illustrates that investors would’ve been better off tracking the index than sitting in an underperforming, and more expensive, actively managed fund.
Over the last 12 months, the tracker has actually outperformed the sector, with returns of 11.32 per cent, and only a whisker behind the index.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
As one would expect the £537m tracker invests in the largest companies in Europe including food manufacturer Nestle, Swiss pharmaceutical giants Roche and Novartis, German pharma heavyweight Bayer and Spanish bank Banco Santander.
US
The US is notoriously difficult to consistently beat the market, making a tracker particularly attractive.
The SSgA North America Equity Tracker is the obvious choice. It has a tracking error of just 0.08 per cent over the last three years, and also has one of the lowest ongoing charges figures, at 0.20 per cent.
Since 2014 began, the tracker has soared ahead along with the index, returning 3.88 per cent while the FTSE North America index is up 4.15 per cent. Funds in the IMA North America sector have gained 2.71 per cent over the period.
Year-to-date performance of fund vs sector and index
Source: FE Analytics
Top positions include Apple, Exxon and Microsoft.
Investors could also consider the Vanguard US Equity Index, with charges of 0.20 per cent, or the BlackRock CIF North American Equity Tracker, which has charges of 0.16 per cent. However, both have higher tracking errors over three years.
Emerging markets
The recent past has been difficult for emerging markets, but the start of 2014 saw the region regain some ground from its sharp losses in the summer of 2013.
The fund which tracks its index most precisely is the Vanguard Emerging Markets Stock Index tracker, which has an error of 0.35 per cent over three years.
Since the start of the year, the tracker has gained 3.89 per cent, in line with the MSCI Emerging Markets index. Funds in the IMA Global Emerging Markets sector gained 3.53 per cent.
Though the tracker did suffer losses along with the index over three years, the losses were similar to those of the average fund in the sector at 8.74 per cent. Over the last 12 months, the tracker is up 4.51 per cent, ahead of the sector, and just a fraction behind the MSCI Emerging Markets index.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Vanguard Emerging Markets Stock Index has ongoing charges of just 0.40 per cent. Compare this to 1. 27 per cent for the likes of Aberdeen Global Emerging Markets Equity or 0.91 per cent for First State Global Emerging Markets Leaders, both of which have underperformed over the last year.
The BlackRock CIF Emerging Markets Equity Tracker is even cheaper, with charges of 0.26 per cent, though it has a much higher tracking error over three years, at 4.72 per cent.
Japan
For exposure to Japan, investors could choose either the Vanguard Japan Stock Index or SSgA Japan Equity Tracker, which have by far the lowest tracking errors at 0.85 per cent and 0.91 per cent over three years, respectively.
Passive and active investors in Japan have had a difficult 2014, but year-to-date both index trackers have held up better than the average fund in the IMA Japan sector, which is down 2.48 per cent.
SSgA Japan Equity, which tracks the FTSE Japan index, is down 1.5 per cent since the start of the year, slightly behind the index over the period.
Year-to-date performance of fund vs sector and index
Source: FE Analytics
The Vanguard tracker, which follows the MSCI Japan index, has suffered more than its peers in the index over the last year, however.
The SSgA Japan Equity Tracker is down 4.36 per cent while the Vanguard tracker is down 5.10 per cent. The IMA Japan sector has lost 4.79 per cent over the period.
Both index trackers have ongoing charges of 0.30 per cent.
For those who are particularly cost-conscious, Fidelity has recently brought down ongoing charges on a number of trackers to as low as 0.09 per cent. However, the majority are yet to amass to three year track record, and the tracking errors are generally higher than those mentioned here.
