Exchange traded funds (ETFs) are designed to track a particular sector, basket of commodities, or index and replicate them as closely as possible. If you want to invest in the FTSE 100, you can typically choose between an index fund and an ETF. The key difference between the two is that ETFs are typically more flexible as they can be bought and sold throughout the day much like stocks.
A FTSE 100 index tracker ETF is designed to track the performance of the FTSE 100 by buying shares in the companies which make up the index. If the FTSE100 goes up by 10%, in theory, so should the ETF you've purchased. If you're interested in learning more about how ETFs work in general, read our article explaining how ETFs work and whether they're right for you.
While your capital is at risk with any investment, the right FTSE 100 ETF can be a good addition to your portfolio. The FTSE 100 has recorded an average annualised return of around 6.8% over the last 30 years. However, all ETFs come with fees which can eat into your returns.
What to consider before buying a FTSE 100 index tracker ETF
An index tracker ETF is what is known as a passive investment and will reflect the fortunes of the index it is designed to track. The price of an ETF will tend to reflect the ups and downs of the relevant index so will suffer disproportionately if a particular sector, that makes up a large part of the index, goes through a downturn. Investing in an index tracker ETF is seen as a long-term investment so that any dips in the relevant index will have time to recover within your investment timescale.
Tracking error
An ETF's tracking error is a measurement of how much the ETF deviates from the actual index it is tracking, such as the FTSE 100. This tracking error can be caused by fund costs, money flowing in and out of the fund or changes in the constituent shares making up the index. The lower a fund's tracking error the better, as it means it better reflects the performance of the relevant index it is tracking.
Costs
While the charges involved with an ETF are generally lower than with actively managed funds you should still check the charges of an ETF versus its peers to ensure you are getting value for money. In order to invest in an ETF you need to use an investment platform to facilitate and administer your holding. These investment platforms levy their own charges on top of those levied by the ETF itself. Therefore you need to ensure that you keep additional charges to a minimum. Unlike when you invest in a FTSE 100 tracker fund (i.e. unit trust), most platforms levy an initial transaction charge when you invest in an ETF. In the next section, we'll take a look at the cheapest investment platforms for investing in a FTSE 100 ETF via a Stocks and Shares ISA, SIPP or general investment account.
The cheapest way to invest in a FTSE 100 index tracker ETF
As stated earlier investing in index tracker ETFs is cheaper than investing in actively managed funds due to the additional management that is required with an actively managed fund. When comparing index tracker ETFs you should compare the ongoing charges figure (OCF) as they differ from ETF to ETF. This figure represents the total cost of running the fund and includes administrative costs such as maintaining records, producing reports and calculating the daily unit price as well as paying for any research that goes into deciding which assets to buy and sell.
Below are three of the cheapest FTSE 100 tracker ETFs which have competitive OCFs.
- OCF - 0.07%
- No other fees are payable
- Tracking error - 0.07%
- ETF type - Physical
iShares Core FTSE 100 UCITS ETF GBP (Acc)
- OCF - 0.07%
- No other fees are payable
- Tracking error - 0.07%
- ETF type - Physical
Vanguard FTSE 100 UCITS ETF (GBP) Accumulating
- OCF - 0.09%
- No other fees are payable
- Tracking error - 0.068%
- ETF type - Physical
In order to invest in a fund you need to use an investment platform or broker. The table below shows the total cost, for differing portfolio sizes, if you were to invest in the Vanguard FTSE 100 UCITS ETF via an ISA or a SIPP with some of the most popular and cheapest investment platforms.
Cheapest way to invest in a FTSE 100 ETF within an ISA
| Platform | Single trade cost | Regular investing cost | Platform Fee | Vanguard OCF fund charge | Annual charge on £10,000 | Annual charge on £25,000 | Annual charge on £50,000 | Annual charge on £100,000 |
Annual charge on £250,000
|
| Hargreaves Lansdown* | £11.95 | £1.50 | 0.45% per year capped at £45 up to £250,000 | 0.09% | £54 | £67.50 | £90 | £135 | £270 |
| Vanguard Investor | £7.50 | n/a | 0.15% p.a. capped at £375 | 0.09% | £24 | £60.00 | £120 | £240 | £600 |
| Interactive Investor* | £3.99 | n/a | £4.99 or £11.99 per month | 0.09% | £68.88 | £82.38 | £104.88 | £233.88 | £368.88 |
| A J Bell* | £9.95 | £1.50 | 0.25% (max £3.50 per month) | 0.09% | £34 | £64.50 | £87 | £132 | £267 |
| Fidelity* | £10.00 | n/a | 0.35% - up to £249,999 capped at £90 for ETFs | 0.09% | £44 | £67.50 | £90 | £135 | £270 |
Cheapest way to invest in a FTSE 100 tracker within a SIPP
| Investment Platform |
Single trade cost | Regular investing cost | Platform Fee per annum | Vanguard OCF fund charge | Annual charge on £10,000 | Annual charge on £25000 | Annual charge on £50000 | Annual charge on £100,000 |
Annual charge on £250,000
|
| Hargreaves Lansdown* | £11.95 | £1.50 | 0.45% up to £250,000 (platform fee capped at £200 for ETFs) | 0.09% | £54 | £135 | £245 | £290 | £425 |
| Vanguard Investor | £7.50 | n/a | 0.15% p.a. capped at £375 | 0.09% | £24 | £60 | £120 | £240 | £600 |
| Interactive Investor* | £3.99 | n/a | £12.99 per month | 0.09% | £164.88 | £178.38 | £200.88 | £245.88 | £380.88 |
| A J Bell* | £9.95 | £1.50 | 0.25% on first £250,000 (max £10 per month for ETFs) | 0.09% | £34 | £85 | £165 | £210 | £345 |
| Fidelity* | £10.00 | n/a | 0.35% - up to £249,999, capped at £90 for ETFs | 0.09% | £44 | £67.50 | £90 | £135 | £270 |
As you can see from the above information the decision about which investment platform to use can make a significant difference to your returns over time. Also, many platforms have the same charges for both ISA and SIPP but not all, so it may be cheaper to have your ISA with one platform and your SIPP with another as shown above.
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