On the surface, index trackers are a simple way for investors to get exposure to a wide range of UK shares. Index tracking PEPs invest in funds that aim to duplicate the performance of an index of shares, such as the FT-SE 100 or the FT-SE All Share Index.
Virgin's PEP, for instance, tracks the FT-SE All Share Index, which includes all 900 eligible companies listed on the UK Stock Exchange. Another popular tracker, the HSBC Footsie PEP, aims to match the performance of the FT- SE 100, which covers the 100 biggest companies in the UK, called blue chips.
One of the key features of an index tracker is that the fund managers will not try to beat an index. The aim is to match it by holding all or a representative proportion of the shares that go to make up the index.
The up-side is that this reduces risk. Index trackers are less volatile than actively managed funds. They are less liable to be exposed to sudden movements in one industry sector on the back of, for example, regulatory worries or poor results.
They are not reliant on the ability of a fund manager to choose the best- performing shares. In addition, their performance is relatively easy to follow. If the market rises 10 per cent, your investment should be up a similar amount.
Of course, there is a pay-off. Both an index tracker's gains as well as its losses are limited to those of the index. But funds that aim to beat the market, by comparison, all too often fail to do as well as the market, or fail to consistently outperform.
Matching the index is no mean feat. Of more than 100 UK equity general unit trusts, less than a quarter outperformed the FT-SE All Share Index in the year to October. Over a five-year period, just one in 10 achieved index-beating performance.
Index trackers tend to be above average performers. In the six months to October, both Gartmore UK Index PEP and the Virgin PEP were up 14 per cent against a similar rise in the FT-SE All Share index they aim to track. Investors in these and many trackers benefit from low charges.
Virgin started the battle to offer the cheapest tracker in March by launching a PEP with no initial charge and an annual management fee of 1 per cent. In July, River & Mercantile launched the cheapest index-tracking unit trust, the Top 100 fund, with just a 0.35 per cent annual management fee. R&M is not offering a PEP version of the fund, but investors can hold its units in a self-select PEP.
Now Legal & General has stormed into the price war, unveiling a new index tracker PEP with a 0.5 per cent annual charge and flat pounds 25 annual fee, with the total annual charge capped at 1 per cent. However, Mark Dampier, investment director of independent financial adviser Whitechurch Securities, warns: "Choosing a tracker fund does not do away with the fact that investors have to take an investment position.
"The danger," he adds, "is that investors will assume that they will do well no matter what the fund is tracking."Reuse content