How buying a more expensive passive fund can really eat into your returns
Thursday 23 May 2019 Author: Yoosof Farah

When it comes to putting your money away for a rainy day, just sticking it in a fund that follows something like the FTSE 100 can sometimes be the simplest thing to do.

After all, the theory goes that markets are efficient and you’ll struggle to outperform over the long-term.

In America, a 2016 analysis of active US equity funds by S&P Dow Jones, for example, found that 99% failed to beat the S&P 500 over 10 years.


Passive funds track a market or index, and are typically a lot cheaper than active funds, particularly when it comes to investing in large UK or US companies.

Many have very low fees, often below 0.4%. However, there are numerous examples of tracker funds with significantly higher fees – and ones which seem unjustified.

Halifax and Scottish Widows both have UK tracker funds which follow the FTSE 100. Halifax charges 1.06% for its Halifax UK FTSE 100 Index Tracking fund (3181225) and Scottish Widows 1% for the Scottish Widows UK Tracker (3163278). Both funds follow the FTSE 100 Total Return Index.

In comparison, another fund following the same index is HSBC FTSE 100 UCITS ETF (HUKX) and it only charges investors 0.07%.

Stocks have historically generated somewhere around 7% a year on average. Taking this as a guide, if you put £10,000 in the Scottish Widows fund at 1% around 10 years ago, before charges your money would have grown to £19,671.51.

Assuming there’s no initial charge, when you add the 1% management fee that figure goes down to £17,790.54, with £1,405.73 paid to Scottish Widows.


Put into the HSBC fund for example, which does exactly the same thing as the Scottish Widows fund, and you’d be paying £102.84 in total to HSBC and your closing pot would stand at £19,534.58. That’s a whopping difference of £1,744.04 extra money paid for a fund which does exactly the same thing as the cheaper option. All figures are before tax. 

Lloyds Banking (LLOY), which owns Halifax and Scottish Widows, has defended the cost of the funds, and says that is a bundled price, not an investment only price, meaning it also includes other services.

It hadn’t responded to our requests for clarification of these services by the time Shares went to press.

Virgin Money bowed to pressure earlier this year when it slashed the 1% fee on its Virgin UK Index Tracking Trust (0930431) down to 0.6%. Comparative tracker funds charge anywhere between 0.07% and 0.1%.

The popularity of these expensive funds is surprising. The Virgin fund has £2.7bn in assets, while the Halifax fund has £1.2bn and the Scottish Widows one a considerably less £403m, but still bigger than the £105m in the HSBC ETF.

A lot of these expensive trackers come from banks and customer-facing companies like Virgin Money, which are often used by first time investors with little knowledge of how to compare costs.

Virgin has previously defended the cost of its fund saying that it includes the cost of its ISA. But even then, you can still move to a platform like AJ Bell Youinvest, where you can buy the HSBC fund and still pay significantly less than 1%.

FTSE 100 trackers are the most popular when it comes to passive funds, but they are by no means the only ones available.

And they are also not the only ones with very big price discrepancies between products which both seemingly do the same thing.

Like the FTSE 100, another simple and often effective area to invest can be UK government bonds, also called gilts.

Gilts are generally considered low risk investments, because it’s unlikely the UK government will ever go bust and default on its debt. A great way to access gilts is through passive funds, and there are no shortage of options out there.

But again beware – while some gilt ETFs can cost as low as 0.07%, others can charge you up to 10 times more. For example, Quilter Investors Gilt Index Fund (B7KHZ15) costs 0.7%.

These funds may look the same, and indeed invest in similar thing, but the companies behind the more expensive ones sometimes point out they follow different benchmarks, with different durations and maturities in the bonds.

Quilter has defended the cost of its gilt index fund, and says the 0.7% fee is part of a rebate-paying share class where generally part of the charge is paid back to end clients. It also says it reviews the cost of all its funds annually.


Away from the UK, another popular area to invest is big European companies. While the price differences aren’t as egregious as the FTSE 100, there are plenty of options to choose from if you want to invest in European large and mid caps, and also a big difference in the price.

In some cases this can be justified by a different focus, particularly for funds investing in the more medium-sized companies, but not always.

M&G Investments, for example, has the M&G European Index Tracker (3092918) with a charge of 0.69%. Index provider State Street has a fund, SSgA Europe ex UK Equity Tracker (GB00B0FR9V92), which tracks a similar benchmark for 0.25%.

In response, M&G reiterates that it is an active manager and while it does have some passive funds, they are not actively marketed, noting that the European fund has less than £80m in assets – a small sum for a company the size of M&G – and is unlikely to grow that any time soon.

So while it can be easier to stick some money in a tracker fund offered by your bank and come back to it in five to 10 years, beware of how much you’re paying, because without even knowing it you could be handing over thousands for literally nothing extra in return.

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