How good are index tracker funds? Standard & Poor’s Fund Research recently issued its findings on the well-developed UK index tracking funds sector, the first time it had undertook such a rating.
Three factors were identified as being crucial in the process. The first is tracking error, to see how closely the capital value of the fund, gross of fees, matched the index it was following. The second, total expense ratios (TERs), were reviewed as funds with high management fees and TERs tended to have wider tracking errors net of costs.
The research found that the range of tracking error is relatively wide, varying from 8 basis points in the case of Gartmore UK Index fund to over 100bps for the Royal & Sun Alliance FTSE100 index funds. Market volatility and the continual change in the companies making up the FTSE100 index meant that tracking errors in these funds had widened over the past 12 months or so. This problem did not affect funds tracking the All Share index. The funds that kept this factor under control seem to be those that moved most adroitly to factor in changes to the index constituents close to the time of the index changes.
Two institutional funds, Hill Samuel UK Equity Index Fund and the Royal & Sun Alliance FTSE All-Share Tracker Fund (Share Class 3), had the lowest TERs at 0.13%, while the highest TER of 1.2% was for the HSBC The Footsie Fund, with an annual management fee of 1%. The lowest rate for a retail tracker fund is 0.4%.
The bid offer spread on funds ranges from zero on no-load fund to 6% in the case of the Barclays FTSE100 fund, which the researchers says is mainly bought by institutional investors.