5 funds for your ISA: Index Tracker

Trackers offer low-cost diversification. But which should you put in your ISA?

Each day this week we're highlighting a fund you may wish to consider for your ISA. Today we turn our attention to the index tracker, which can produce market returns at low cost.

Some investors are uncomfortable buying individual shares: they're too risky, they think. But investment funds, which spread the risk by holding a selection of shares chosen by the fund manager, often carry an equally obvious drawback: high charges.
The good news: there's a low-cost investment that combines risk-reducing diversification with low charges. Step forward, the index tracker.

Or at least, some index trackers. For while most trackers carry charges that are reasonable, a few are too pricey. And just a handful really merit the description 'low cost'.

So what is an index tracker? Where do you buy them? And which ones are worth buying?

Follow the index
Stripped to the basics, index trackers aren't complex. They're simply 'baskets' of shares chosen to mimic whatever happens to the stock-market index they're tracking -- London's flagship FTSE 100 index, for instance, or the more broadly-based FTSE All-Share index.


The market goes up 5%; your tracker goes up 5%. The market goes down 5%? Your tracker goes down 5%, too.

And that's why -- properly chosen -- they're a low-cost investment. Quite simply, a computer does all the work of buying and selling.

Dividends, too
Better still, buy a tracker in the form of 'accumulation units', and the dividends thrown off by the companies in the index in question are automatically re-invested for you in more shares -- which then throw off more dividends, and so on.

You want the income paid to you, so that you can spend it, or re-invest it yourself within your ISA? Buy 'income units', instead.

Which tracker?
Your bank will probably be able to sell you an index tracker. The financial pages of the weekend newspapers carry advertisements for trackers, too. But generally speaking, it's cheaper to buy through a fund supermarket, or 'platform'.

So which tracker to buy? Not every fund supermarket carries every tracker, so the trick is to look for a tracker's Total Expense Ratio (TER), and buy a tracker with a low TER.

Among FTSE All-Share trackers, popular picks include Vanguard's FTSE UK Equity Index (TER 0.15%), HSBC's FTSE All Share Index (TER 0.27%), and Fidelity's Moneybuilder UK Index (TER 0.30%). There's less choice when it comes to FTSE 100 trackers, but good picks include HSBC's FTSE 100 Index (TER 0.27%) and Liontrusts's Top 100 Fund (0.42%).

Former popular choices, which are these days best avoided on grounds of cost, include Legal & General's UK 100 Index (TER 0.81%), Virgin's FTSE All-Share Tracker Fund (TER 1.00%) and Aviva Investors' UK Index Tracking (TER 0.93%).

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