The FE Research team has added a number of tracker funds and exchange traded funds (ETFs) to its FE Select 100 list of recommended funds, following the launch the innovative FE Passive Fund Rating system.
The passive fund market has become increasingly popular over recent years due to the push towards greater transparency within the industry and an increased focus on fund manager fees and the cost of investing.
Given the growing popularity of passively managed funds, FE recently launched its innovative Passive Fund Ratings, which judge passives principally on tracking difference, tracking error and fund size to give investors a better idea of the quality of funds in the index-tracking market.
As FE Trustnet highlighted earlier this year, it is the most extensive rating system of index trackers funds in the retail industry, allowing investors to objectively compare conventional trackers and ETFs with each other for the first time.
On top of that, to give investors a greater level of understanding and options, the FE Research team has now added its 29 favourite trackers to the FE Select 100 – which had previously only been a list of recommended actively managed funds.
Therefore, in this article we take a closer look at the equity trackers which made the cut and highlight why they are so highly rated.
UK equities
Given that it is the most popular market with investors, it is no surprise that six UK equity passives in total have made the FE Select 100 and combined they offer exposure to most parts of the domestic market.
For example, the likes of the Santander Stockmarket 100 Tracker Growth fund, the DB X-Trackers FTSE All Share UCITS ETF and the HSBC FTSE 250 Index fund have all made the grade.
One of the largest on the list is the £1.6bn Fidelity UK Index fund, which carries a five FE Passive Fund Rating, uses a sampled physical replication strategy and has an ongoing charges figure (OCF) of just 0.15 per cent.
According to FE Analytics, the fund has returned 40.09 per cent over the three years which means it has had a tracking difference relative to the FTSE All Share of 2.36 percentage points over that time.
Performance of fund versus sector over 3yrs
Source: FE Analytics
Fidelity acts as the distributer of the fund while Geode Capital looks after the day-to-day running of the portfolio.
The FE Research team says there are a number of reasons why Fidelity UK Index made the list.
“Its approach of keeping things simple and efficient is a core quality for any passive manager, and lends itself well to its team-based portfolio management approach. This reduces key employee risk, and makes full use of its experienced team of investment professionals,” our analysts said.
“Although Fidelity’s range of index funds do have the capacity to perform stock lending, in practice this is very rarely done, so there is virtually no counterparty risk involved with the funds.”
Developed market equities
If investors want to look outside the UK equity market, the FE Research team has included a swathe of Europe, Japan and US trackers within the Select 100.
Recent FE Trustnet articles have shown that the European equity market has been a rich hunting ground for active managers as close to 80 per cent of active IA Europe ex UK funds have beaten the MSCI Europe ex UK sector over the last 10 years.
However, if investors want cheap but top quality exposure to continental equities, the FE Research team currently recommends the likes of Amundi ETF MSCI EMU, iShares Core EURO STOXX 50 UCITS ETF and the HSBC European Index fund.
In terms of the US and Japan, though, active managers have struggled to justify their often higher ongoing charges.
Factors such as the overanalysed nature of the US market and compliance issues surrounding underlying benchmarks have historically worked against managers within the IA North America sector, in fact just 15 per cent of them have beaten the S&P 500 over the past five years.
For investors who want exposure to the world’s largest economy, four passives have made the FE Select 100.
One of which is the £2bn Pictet USA Index fund, which tracks the S&P 500 and uses full physical representation.
FE data shows that the fund has returned 61.40 per cent over the last three years and has had a tracking error of 1.66 percentage points over that time.
Performance of fund versus index over 3yrs
Source: FE Analytics
“The fund offer a no-frills approach to passive investing and only features stock lending in specific cases,” the FE Research team said.
“It is positive to see that Pictet values transparency, and a lot of in-depth information is freely available through its website. Additionally since its funds rely on physical replication, investors need not be concerned with large scale derivate use, which removes a major source of counterparty risk.”
Pictet USA Index has an OCF of 0.34 per cent.
Emerging market equities
More than half of active fund managers in the IA Global Emerging Markets sector have struggled to beat the MSCI Emerging Markets index over the past three years, a period that has covered a tricky time for these funds owing to the 2013 taper tantrum.
Also, with both emerging market funds run by Aberdeen and First State – two groups which have dominated the sector over the past decade or so – near or at capacity, investors may want to look for different exposure to the developing world.
FE Research has added two emerging market trackers to its recommended list, one of which is the £4.6bn Vanguard Emerging Markets Stock Index fund, which has a sampled physical with lending replication strategy.
The tracker is up 9.89 per cent over three years while the IA Global Emerging Markets sector average has returned 9.22 per cent. The MSCI Emerging Markets index has gained 10.75 per cent.
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
According to the FE Research team, the fund benefits from Vanguard’s downward pressure on costs.
“Vanguard benefits from an uncommon corporate structure, whereby any profits from its funds’ management fees are either used to improve its product range, or are reinvested into the funds to reduce their overall cost,” the team said.
Vanguard Emerging Markets Stock Index has a clean OCF of 0.27 per cent.