Tracker funds engage in cut-throat price war

A major provider of index-tracker funds slashed its fees this week, as a cut-throat price war continues to push down the cost of passive investing. BlackRock, the world's largest money manager, has reduced the fees on its giant £8.3bn UK Equity Tracker which tracks the FTSE All-Share index from 0.16% to 0.07%. It has also cut the fees for its 100 UK Equity Tracker, which tracks the FTSE 100, by the same amount, and those on its US Equity Tracker and North American Equity Tracker from 0.16% to 0.08%. Fees on the Continental European Equity Tracker have been cut from 0.17% to to 0.1%. These changes will take effect on 11 August.

This means that BlackRock has moved ahead of passive specialist Vanguard, the second-largest firm by assets under management globally, in the race to offer the cheapest UK equity tracker. Vanguard's FTSE All-Share tracker charges 0.08% plus an upfront dilution levy of 0.2% (dilution levies are designed to ensure that dealing costs and transaction taxes are covered by new entrants rather than long-term holders).

Competition has been growing between the major providers of tracker funds for some time, as each vies for leadership in this growing area. But the market really began to heat up last year. Fidelity slashed fees on the majority of its trackers in May 2014, throwing down the gauntlet to other providers and temporarily becoming the UK's lowest-cost provider in the process. In October 2014, Legal & General reduced charges to 0.1% on its main US and UK index trackers. (These rates apply when investing through a fund supermarket going direct to the provider will often be more expensive.)

This is good news for investors. Lower fees mean squeezed margins for fund providers, but more affordable investing for us. But picking the right tracker isn't as simple as finding the cheapest one. Costs are crucial, but it's also important to consider "tracking difference" and "tracking error" how much the fund diverges from the benchmark index. If you choose the tracker with the lowest fees, but it consistently lags its index by 0.5%, you will lose far more due to tracking difference than you gain from lower fees. So investors chosing a tracker fund may want to look at the recently launched passive fund ratings run by research firm FE Trustnet, which take into account how closely the fund has followed its index. Cheap funds awarded top marks by FE Trustnet include the FTSE All-Share trackers from BlackRock, Fidelity and Vanguard.by Hector Reid