By Simon Lambert for Thisismoney. Tracker and index funds are ideal for those who want to invest but don't want the hassle of picking shares and want to avoid the often hefty costs using a traditional active fund manager involves.

These funds ditch the concept of trying to cherry-pick a selection of shares to beat the market and are instead designed to follow a set index, such as the FTSE Index funds can keep costs ultra-low and while they won't beat the market neither should they fall far behind it - the idea instead is that slow and steady investing wins the race.

So if you are thinking why should you pay for a fund manager's Porsche when you can get cheaper investing - and often better performance - by just following an index, we take a look at some of the cheapest index trackers and how to invest. Following an index is cheaper than an active fund and often more successful. Index-tracking funds exploded in popularity in the s when a handful of firms began offering them to small investors - they had already been used for decades by professional money managers.

Over the past 20 years they have developed a loyal band of followers who believe that trying to pick a fund manager, who will in turn try to beat the market, is too much of a gamble to deliver consistent investing success. Index funds take two main formats and are typically known as either tracker funds or exchange traded funds. We take a look at the best of both of these in this round-up. The aim of both is the same, to track a given index.

However, tracker funds was traditionally the name given to those that work like investment funds called Oeics and unit trusts in investing jargonwhile ETFs are traded on stock exchanges like ordinary shares. The popularity of ETFs has boomed in recent years, with the London Stock Exchange revealing there are nowETF trades a month, compared to about 10, a decade ago. It says there are now ETFs available on the exchange.

Some professional investors now use ETFs to build portfolios that invest around the world and target different assets, sectors and countries. Both traditional tracker funds and ETFs keep costs ultra-low as there is no need for expensive fund managers who try to pick winners for you. Part of the argument is that by trying to pick a winner, you open the door to choosing a loser and falling behind. This is Money takes a balanced stance on the merits of passive index funds vs active fund managers.

For many investors a tracker will be best, but for others carefully picking good fund managers can really pay off. Average fund managers may not beat the market consistently, but good ones can do and can also offer something a bit different. Picking a fund manager requires research, a leap of faith and often some patience - and the commitment to evaluating them at least once a year.

Ultimately, it comes down to your own personal choice and remember, beware hype and always do your own research. Better information, campaigns against high fees and regulatory changes that have demanded more transparency on performance and charges have also all made investors question the benefit of expensive active managers. Fund managers buy shares in companies that they hope will beat the relevant index, such as the FTSE or the All-Share.

In other words, they aim to achieve returns better than the wider stock market. However, a host of industry and academic reports will tell you that in doing so, the majority pick the wrong stocks and their fund then underperforms the market.

They attempt to track the performance of the index itself, rather than set out to beat it. This is because they believe that in the end, no traditional manager manages to do better than the index for very long, and if that is so, it makes more sense to literally track the index.

How they do this differs between funds. Some index funds buy shares in all the companies that make up the index. Others use complex financial instruments to track what the index does by buying shares in a cross-section of companies. This is why the performance of, say, a UK FTSE All-share tracker fund can differ slightly between providers. The benefits in a nutshell are: This is a controversial question.

When markets rise, trackers tend to fare better relative to actively managed funds. But when a bear market begins to bite, trackers slip down the fund performance league tables. This is because a fund manager can act to try and limit the effects of a downturn, selling out of shares most likely to be hit.

Active managers will tell you that index funds have had a boost in recent times from low interest rates and quantitative easing, with this easy credit providing a rising tide that lifts all boats. The main benefit is the cost. Since tracker firms do not need to employ expensive fund managers to pick shares, they are cheap to run. This should be reflected in lower costs for investors. A traditional active fund typically charged you 5 per cent up front and then 1. This has changed in recent years and now investors buying through a DIY investing platform almost always avoid the initial charge, while annual management charges are often closer to 0.

Yet still most tracker funds are considerably cheaper. Most do not charge anything up front and have a fee commonly between 0. As a point of comparison, some trackers charge as little as 0. Low charges are the investor's best friend, as your returns are not being eaten by fees - this is something that can build up to a sizeable amount over the years thanks to compounding.

The accumulating effect of annual charges is startling. You can do your own sums with our fund charges calculator. But the other big factor that makes trackers ideal for first-time investors is that they are easy to understand and you don't need to keep watching your fund manager to make sure he or she is making the grade. You also don't need to worry about which fund manager to choose, you simply pick a broad market and track that. The argument offered from fund managers, advisers and many fund-selling DIY investing platforms and brokers is that you get what you pay for.

When weighing up this argument, it is always worth bearing in mind that it may be coming from someone who is part of the industry that has made lots of money from active fund management. The argument put forward by those who say active funds are better than trackers can be summed up along these lines: They argue that your Jaguar or Rolls Royce-style manager is worth stock market closing time 12/24/13 extra money because they may be able to pick up some stunning share winners and position themselves to avoid the worst of any market storms.

But as critics rightly point out, it may not pan out this way, sometimes paying a premium doesn't get you better returns - they can end up worse. If you want to really stretch the car analogy, it's also notable that problems with Jaguars and Rolls Royces tend to prove far more expensive when things go wrong.

The problem is that while good fund managers can deliver great returns, nobody can say with any certainty, which managers will pick the best stocks and outperform the market. To prove that outperformance, they need to be evaluated over a very long time - and even then the market can move against them and leave investors suffering in the short-term.

If you want to capitalise on fund managers and think you have found some good ones worth following, some financial theories recommend a blend of both trackers and active funds. You can use the index funds as the bulk or core part of a portfolio and the active ones as satellite elements to try and give performance a turbo-boost. There are some very good fund managers who do actually outperform over very long periods of time, but they are fewer and farther between than the active fund management industry lets on.

There is little point in deciding to invest through index funds and then opting for one that carries high fees, so whatever you do check the costs.

Another drawback to trackers is 'tracking error'. This is where a tracker fails to accurately follow the index. It is normally only marginal but some funds can drift wider over longer time spans. Those with the highest charges often have the worst tracking error: Another danger is that as simple index funds also reflect the make-up of that index, they will hold companies and sectors proportionally to their size.

Sometimes companies and sectors become huge, making up a big chunk of the index and leaving tracker investors highly malaysia futures brokers association to individual stocks or sectors, as happened with banks in Below, we list some of the UK's cheapest low-cost FTSE and FTSE All-Share tracker funds, highlighting each one's ongoing charges. The ongoing charge is a better indication of the real cost than the annual management fee, taking all administration and dealing charges into account.

But you also need to consider the overall cost of investing, which includes any dealing fees and platform charges. Blackrock UK Equity Fund - 0. BlackRock UK Equity Tracker - 0. HSBC FTSE Index - 0. HSBC FTSE All Share Index - 0. Fidelity Index Emerging Markets - 0. BlackRock Emerging How much money earned by dhoom 3 Equity Tracker - 0.

Invest in big companies. Invest in small companies. Vanguard Global Small Cap Index Fund - 0. A standard global tracker will most probably include UK investments, so if you already have a tracker based on British stocks then it may be worth finding a global tracker that excludes them so you don't double up.

Equity Index Fund 0. Aviva Investors International Tracking - 0. Blackrock Overseas Government Bond Tracker - 0. Government and corporate bonds. Vanguard Global Bond Index - 0.

This is Money and Bestinvest. Vanguard offers a range of LifeStrategy portfolios that put your money into a range of index funds and bonds from around the world. The ongoing charges figure is 0. Like trackers, Exchange Traded Funds aim to mimic the binary options 101 pdf of a particular market or index such as the FTSE and like a tracker their value is determined by whether or not the index rises or falls.

But ETFs differ in that they are traded like individual stocks, on an exchange such as the London Stock Portable stock market tracker funds and can be bought and sold through brokers in the same way as any other listed stock. Trackers may be cheaper to buy and sell compared with ETFs if you can find a platform that doesn't charge for fund dealing, as ETFs may incur a share dealing charge.

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Work at home drafting jobs London Stock Exchange says: The cheapest FTSE All-Share ETF is the SPDR FTSE UK All Share ETF which carries an ongoing charge of 0. Vanguard's FTSE ETF which simple trading strategy forex an ongoing charge of 0.

You can invest direct with some tax rate for incentive stock options or through a DIY investing platform, the latter will incur an extra charge for the platform but will allow you to manage all your investments together and keep them all within one Isa wrapper, if you choose. You can also combine all sorts of investment and access research and data on performance and prices of both active and passive funds through a platform.

With a platform, as well as the charge for the fund, you will either have to pay a flat fee each year or a percentage charge linked to the size of your holdings. The decision on what is right for you will mean considering how regular an investor you will be and how much you want to invest.

Isa tips: 12 of the world's best tracker funds - Telegraph

There is a trade-off between admin charges and dealing fees to be weighed up, along with whether your situation means you will be best with a sample earnest money contract texas or percentage fee.

A flat fee tends to work out better when investing a large amount, while a percentage fee can be better for small investments. You also have to decide on the type of products you want to invest in. Ecn binary option brokers platforms will be better for fund dealing, some will be better for shares and investment trusts, and some have a wider choice of products with annual management charges that have been negotiated down for customers.

As with any investment strategy, you should adopt the safety-first philosophy: The low charges and simplicity of a tracker fund make it an ideal core holding in your portfolio. You can then use more traditional funds to build on that base. Also, shop around on charges, using our guide above as a starting point.

Tracking is far more effective in 'efficient' markets, such as larger companies in the UK and the US. In countries such as these, financial systems ensure that everything investors need to know is in the public domain and well reported. There are also big investing industries generating huge amounts of research on the biggest companies and employing a small army of people trying to profit from their shares.

Therefore, it is harder for a fund manager to seek out bargain stocks that have been overlooked and he or she will struggle to beat the index. But in less efficient markets, such as emerging markets and Asia, or niche areas like smaller companies, stock-picking fund managers find it easier hunt out gems and therefore find it easier to beat trackers.

You still need to spend some time picking a good manager though. The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline. By posting your comment you agree to our house rules. We will automatically post your comment and a link to the news story to your Facebook timeline at the same time it is posted on MailOnline. To do this we will link your MailOnline account with your Facebook account. You can choose on each post whether you would like it to be posted to Facebook.

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Expert warns households against persuasive cold callers after he was stung himself No cover if your passport is lost on holiday: How to find the cheapest and best index tracker funds and take the hassle and cost out of investing By Simon Lambert for Thisismoney. THE THIS IS MONEY VIEW: ACTIVE VS PASSIVE FUNDS This is Money takes a balanced stance on the merits of passive index funds vs active fund managers.

Poll Do you invest in index funds through a tracker or ETF? Yes - most of my portfolio. Yes - a little of my portfolio. No - but I plan to. No - I prefer active investing. Do you invest in index funds through a tracker or ETF? Yes - most of my portfolio votes Yes - a little of my portfolio votes No - but I plan to votes No - I prefer active investing votes Now share your opinion.

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