The cheapest ways to track global stock markets

Tracker or passive funds, which blindly follow the up and down movements of a stock market, have been selling like hot cakes over the past couple of years.

Lower costs, with some tracker funds charging less than 0.1 per cent versus typically around 0.9 per cent for an active fund, is a key attraction.

Simplicity is another: investors - particularly those who are younger - favour the certainty offered by a fund that will do what it says on the tin.

With active funds, in contrast, investors hope the manager outperforms the index and various academic studies that have shed a poor light on active funds' ability to add value.

Here Money Observer rounds-up the cheapest ways passive investors can track various markets.

Global - growth investors

Passive funds are an easy way to build exposure to global markets, with a wide range of options– not just plain vanilla trackers. Here are passive funds that provide different types of
global exposure.

Vanguard FTSE All-World UCITS ETF: This exchange-traded fund tracks the FTSE All World index of around 2,900 stocks in 47 developed and emerging markets. Its annual ongoing charge (OCF) is 0.25 per cent.

Vanguard FTSE Developed World (ex UK): If you’re looking to track developed markets only, this fund is an exceptionally low-cost option. Its OCF is 0.15 per cent.

SPDR MSCI World Small Cap: Most world indices consist of blue-chip stocks, but State Street’s ETF tracks the MSCI World Small Cap index of 4,000 smaller companies in  developed markets worldwide, including 55 per cent in the US. Its OCF is 0.45 per cent.

iShares Edge MSCI World Minimum Volatility: This smart beta ETF tracks an index constructed of stocks that have tended to be less volatile, which may be attractive to investors
concerned about the prospect of a correction in highly valued markets. Its OCF is 0.3 per cent.

Global - income investors

Vanguard FTSE All-World High Dividend ETF: Tracks the fortunes of companies paying dividends that are generally higher than average. The OCF is 0.29 per cent and it yields 3 per cent.

SPDR S&P Global Dividend Aristocrats ETF: Has an OCF 0.45 per cent and yields 3.3 per cent. This ETF follows high-yield shares that have raised dividends over the past decade.

WisdomTree Europe Equity Income ETF: Tracks a basket of high-yielding European equities. The OCF is 0.29 per cent and it has a yield of 5.9 per cent.

UK

There is not a great deal to choose from among plain vanilla FTSE 100 trackers, but Peter Sleep, a senior portfolio man¬ager at 7IM, recommends the Vanguard FTSE 100 UCITS ETF. ‘It costs just 0.09 per cent and is cheap as chips,’ he says. ‘There are cheaper ETFs [exchange-traded funds], but this one tracks its index slightly better and is very easy to buy and sell.’

There is a greater selection of UK income index funds. The strategies broadly divide into two. Some take a high dividend yield as the only or main factor: (iShares UK Divi¬dend UCITS ETF (OCF 0.4 per cent), Vanguard FTSE UK Equity Income Index (OCF 0.22 per cent) and WisdomTree UK Equity Income UCITS ETF (OCF 0.29 per cent) are exam¬ples. Others include a quality screen to try and avoid high-yielding stocks where the historic yield is high because the market is discounting dividend cuts.

The SPDR S&P UK Dividend Aristocrats UCITS ETF (OCF 0.3 per cent) only holds stocks with a long history of dividend stability, while BMO MSCI UK Income Leaders (OCF 0.35 per cent) screens out stocks that perform badly on a range of quality measures, to avoid situations where dividends are more vulnerable to being cut.

‘The quality-screened income strategies result in slightly lower levels of income, much more con¬centrated portfolios and a very different profile from the benchmark index,’ says Sleep. ‘While a name like “Dividend Aristocrats” might sound appealing, it pays to look behind the nomenclature and see how these things work; this approach would have held the banks right into the crisis and only sold after the dividend cuts.’

Sleep’s preference is the Vanguard FTSE UK Equity Income fund, which costs 0.22 per cent, yields 4.74 per cent and tracks the FTSE 100 index fairly closely.

Europe

iShares MSCI EMU UCITS ETF gives diversied exposure to eurozone companies.

For income, and with an OCF of 0.33 per cent, there is SPDR S&P Euro Dividend Aristocrats UCITS ETF (EUR), which tracks the performance of a basket of companies that consistently pay high dividends. It has an OCF of 0.3 per cent. Vanguard FTSE Developed Europe ex UK Equity Index offers non-ETF passive exposure to the region and has an OCF of just 0.12 per cent.

US

Historically, the US market has been an obvious one to seek exposure to through passive funds, as the larger companies in particular are so heavily researched that it is very difficult for active fund managers to find pricing anomalies.

One of the cheapest ways to gain exposure to the US market is through the iShares Core S&P 500 UCITS ETF, which has an ongoing charge of just 0.07 per cent. For investors focusing on dividends rather than pure capital growth, the SPDR S&P US Dividend Aristocrats UCITS ETF has an annual charge of 0.35 per cent. If you think the US stock market will sustain its technology-driven rally, you could consider the tech-focused PowerShares EQQQ Nasdaq-100 UCITS ETF, which has an ongoing charge of 0.3 per cent.

Japan

HSBC Japan Index tracks the FTSE Japan Index and has an OCF of 0.20 per cent. Vanguard FTSE Japan similarly tracks the index of large and mid-caps. It has a slightly lower OCF of 0.19 per cent. The iShares MSCI Japan Small Cap UCITS ETF gives more domestic exposure, as it tracks the performance of an index composed of small-cap Japanese companies. It has an OCF of 0.58 per cent.

Emerging markets

Passive funds are not necessarily suited to the sheer diversity of emerging markets,
and they are likely to be heavily exposed to China because many of them follow the MSCI Emerging Market index.

However, there are some options worth considering, including the iShares Edge MSCI Emerging Markets Minimum Voltility UCITS ETF, which has an OCF of 0.4 per cent. It tracks an index composed of selected companies from emerging economies that have lower volatility than the broader emerging equity market.

Vanguard FTSE Emerging Markets UCITS focuses on Chinese and Taiwanese equities and has an OCF of 0.25 per cent. Alternatively, the iShares Core MSCI Emerging Markets IMI UCITS ETF has a lot of exposure to large, mid and small caps in China and South Korea; it too has an OCF of 0.25 per cent.

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