Clearer product charges to lead to a rise in trackers and ETFs

Low-cost funds are set to soar in popularity, but cost is not the only consideration for investors. Emma Dunkley reports

Hidden charges are the scourge of investing, but you'll be pleased to hear that imminent changes in regulation will make it easier for you to see exactly what you're paying for when buying an investment product.

And it's this realisation of what you're spending in charges, along with the rock-bottom interest rates making it hard to generate returns, that will cause low-cost tracker funds to soar in popularity.

Although it's by no means a panacea, the Retail Distribution Review – which comes into force in the new year – will make the cost of investing much more transparent, so you can see what you're paying for a product, how much in fees to your adviser and how much on other charges.

The RDR will also put an end to financial advisers collecting commission for recommending certain products, which until now, has meant some intermediaries have snatched a few per cent of your investment up-front for selling you actively managed funds.

In contrast, index-tracker funds and exchange-traded funds, which tend to be much lower in cost than actively managed funds, do not pay commission to advisers, and so have taken a back seat as a result. With the end of commission in sight, index trackers and ETFs are set to feature more prominently on advisers' radars.

"As the cost will be so much more transparent, I find investors rightly question what they receive in exchange for the cost they pay and the charge of an active fund manager is a key point of this," says Philippa Gee, of Philippa Gee Wealth Management. "So this naturally pushes investors to consider lower-cost options, which include trackers, ETFs and some investment trusts."

Index trackers are funds that aim to return the performance of the market through an index, rather than try to outperform it, like fund managers. These funds buy the shares in all the companies, or in some cases the majority of them, that make up the relevant index, such as the FTSE 100.

The benefits are that the charges are very low and you don't have the risk of an active manager who could underperform the market.

ETFs are a more recent phenomenon, emerging in the UK only 12 years ago, after booming in the United States. They are like index trackers in that they aim to follow a market, but they have the advantage of being able to be bought or sold throughout the trading day, like a share.

Whereas index trackers tend to have minimum investments of £1,000, for example, you can buy one unit in some ETFs for just over a fiver. There are also a wider range of ETFs out there, investing in Latin America equities to UK government bonds.

And there are more of these products coming to market, giving you a wider choice than before. In the past couple of weeks, Fidelity, an active fund management group, launched a US index tracker, while L&G launched the first global emerging markets government bond index tracker.

ETFs are also launching rapidly, with more refined products coming to market all the time. With such a wide choice, product providers are taking note of the need to educate independent financial advisers. "We're hiring a team to focus on the IFA market in the UK," says Joe Linhares of iShares, the largest ETF provider. "Interest in index products across Europe has really picked up over the last couple of years."

With RDR less than a month away, there has been a significant increase in the number of new ETFs listed on the London Stock Exchange in 2012 as well as new ETF providers entering the market, according to Deborah Fuhr, from the consultancy firm ETFGI. "Many providers of ETFs hope and believe that RDR will lead to increased use of ETFs by financial advisers and retail investors in the UK. In the US, the use of ETFs by fee-based financial advisers and end retail investors are a significant portion of users of ETFs."

But, as with any investment, there are risks attached to tracker funds and points you should be aware of when talking to your IFA or before buying them.

"Consumers need to be selective when they chose index trackers as there is a wide range of prices," says Peter Sleep at Seven Investment Management.

The price range of FTSE 100 trackers can go from 0.1 per cent to 1 per cent, which is quite a difference between the cheapest and most expensive tracker, says Mr Sleep.

And it's not just a one-way bet, as trackers can go down as well as up. "Trackers and ETFs will track the stock and bond market very efficiently and consumers should be aware that if the markets fall, their investments will match those falls, although over the long term they should do well," says Mr Sleep.

There are certain areas where actively managed funds, despite having higher charges, will be better value. "There's no doubt some markets are better suited to active management," says Tom Stevenson, investment director at Fidelity.

He says: "With the emerging markets, for example, there's a bigger dispersion between shares performance and it's easier for an active manager to get an edge in a less researched market."

Mr Stevenson adds that, whereas with an active fund you may, or may not, outperform the market, with an index tracker or ETF, you will simply follow it and accept that you are investing in the good companies in an index, as well as the bad.

"You can have completely passive portfolios - but just be aware that cost is not the only factor," says Ms Gee. But it is an important one.

With changes over cost transparency in view, low-cost trackers and ETFs will rise in popularity. But remember, there are still risks involved, even if they look cheap and simple.

Emma Dunkley is a reporter at Chiara Cavaglieri

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Life and Style
techPatent specifies 'anthropomorphic device' to control media devices
Voices
The PM proposed 'commonsense restrictions' on migrant benefits
voicesAndrew Grice: Prime Minister can talk 'one nation Conservatism' but putting it into action will be tougher
News
Ireland will not find out whether gay couples have won the right to marry until Saturday afternoon
news
News
Kim Jong-un's brother Kim Jong-chol
news
News
Manchester city skyline as seen from Oldham above the streets of terraced houses in North West England on 7 April 2015.
news
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Neil Pavier: Management Accountant

    £45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

    Sheridan Maine: Commercial Accountant

    £45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

    Laura Norton: Project Accountant

    £50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

    Day In a Page

    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf
    From Shakespeare to Rising Damp... to Vicious

    Frances de la Tour's 50-year triumph

    'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
    'That Whitsun, I was late getting away...'

    Ian McMillan on the Whitsun Weddings

    This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
    Kathryn Williams explores the works and influences of Sylvia Plath in a new light

    Songs from the bell jar

    Kathryn Williams explores the works and influences of Sylvia Plath
    How one man's day in high heels showed him that Cannes must change its 'no flats' policy

    One man's day in high heels

    ...showed him that Cannes must change its 'flats' policy
    Is a quiet crusade to reform executive pay bearing fruit?

    Is a quiet crusade to reform executive pay bearing fruit?

    Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
    The King David Hotel gives precious work to Palestinians - unless peace talks are on

    King David Hotel: Palestinians not included

    The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
    More people moving from Australia to New Zealand than in the other direction for first time in 24 years

    End of the Aussie brain drain

    More people moving from Australia to New Zealand than in the other direction for first time in 24 years
    Meditation is touted as a cure for mental instability but can it actually be bad for you?

    Can meditation be bad for you?

    Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
    Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

    Australia's first-ever Eurovision entrant

    Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
    Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

    Laughter, but no tears, as Letterman takes his bow after 33 years

    Veteran talkshow host steps down to plaudits from four presidents
    Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

    Hozier's 'blasphemous' song takes Novello award

    Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
    Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

    Join the tequila gold rush

    The spirit has gone from a cheap shot to a multi-billion pound product
    12 best statement wallpapers

    12 best statement wallpapers

    Make an impact and transform a room with a conversation-starting pattern
    Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

    Paul Scholes column

    Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?