Should you buy cheap tracker funds?

Last week wasn't a happy one for broker Hargreaves Lansdown (HL). First its shareholders noticed the inadequacy of its arrangements for executive pay. Then its clients noticed that its new monthly platform fees were making what used to be cheap funds not so cheap any more. Neither were impressed. However, this week HL has gone some way to redeeming itself with the launch of an ultra-cheap UK All Share tracker fund.

The fund, created with Scottish Widow Investment Partnership (SWIP), will come with an annual management fee of a mere 0.07% and a total expense ratio (TER) of 0.11%. That's cheap: the average tracker fund charges more like 1%. The SWIP Foundation Growth Tracker, on which the new tracker is based, comes in at 1.14% and even most exchange-traded funds (long admired for their low fees) cost more.

The only other funds on the market that compare are Fidelity's MoneyBuilder UK Index fund and HSBC All Share tracker. But both have TERs nearing 0.3%. Yet before you rush to invest, do note that HL's platform fees of £24 per fund per year don't make this much of a deal for small investors. Investing £1,000 for a year costs £25.10 for the SWIP fund, which equates to a 2.51% annual charge. As Which? points out, it's "difficult to see any genuine value".

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A year in, say, the Fidelity fund, with no extra fees, would cost only £3 or so. The same problem applies to the funds HL has just introduced from US tracker giant Vanguard. These come with TERs of between 0.15% and 0.33% making them also look like some of the cheapest funds around but add in the platform fee and again things don't look too good for smaller investors.

On the plus side, HL also offers tracker funds from BlackRock. Invest in these and you'll pay a higher TER 0.57% rather than 0.11%. But as HL gets paid for offering these funds via rebated commission from BlackRock, you won't pay a platform fee. So if you are investing less than £5,000 via HL you should go for a BlackRock fund. Much more and you should think about the SWIP fund.

The key thing to note is that, as the platform fees are fixed, the more you invest, the cheaper the new tracker gets. Put £10,000 into the SWIP fund and it will cost you £35 a year. Choose the BlackRock UK Equity Tracker and it will cost you £57. In the context of the charges a British investor has had to pay in the past, these are both very cheap. But given they both do the same thing, you might as well pick the cheapest one of all.