Investing seems complex when you first start, but picking the right investment funds for beginners can make it much more straightforward, and give you an easy on-ramp to building your wealth over the long term.

So if you’re wondering how to begin investing, picking out one or two top funds could be a great place to start.

“Investing is a measured and long-term process,” says Rob Morgan, chief investment analyst at Charles Stanley. “It involves taking risk but doing so in a way that minimises and mitigates it, to more reliably harness the growth available across global economies and individual companies.”

Investment funds are a particularly good option for beginners because they offer a convenient way to manage the level of risk you’re taking. Investing in a fund spreads your money, and therefore your risk, across dozens of different companies.

There are funds for almost any type of investment, from sustainable funds that can grow your wealth while making a positive impact, to AI funds that track the world’s most cutting-edge technology.

Investment funds explained for beginners

There are several types of funds, including:

• Open-ended funds;
• Closed-ended funds (or, more commonly, ‘investment trusts’);
• Exchange-traded funds (ETFs).

Each has its advantages and disadvantages. But the simplest and most relevant for beginner investors are ETFs.

An ETF is a fund that trades as a single share on a stock exchange. Its price changes while stock markets are open in line with changes in the price of the assets it tracks. You can buy and sell it in a stocks and shares ISA, just as if it was a stock.

There are ETFs for almost everything, but beginners might be particularly interested in ETF index funds. These track a specific index, such as the UK’s FTSE 100 or the US’s S&P 500.

“If you’re not sure which companies you wish to own, you may want to consider a tracker fund, or an ETF,” says Claire Exley, head of advice and guidance at J.P. Morgan Personal Investing. “These will allow you to hold a small amount of, for example, every company listed in the FTSE 100.”

Index funds are usually low-cost: because they just track an index, there’s not much to pay by way of management fees.

Best of all, they usually outperform more active stock-picking strategies. AJ Bell’s December 2025 Manager versus Machine report found that only 20% of actively-managed funds (IE, those where the manager decides when to buy and sell stocks, rather than just tracking an index) outperformed a passive alternative over the last five years.

Three types of investment funds for beginners to consider

If you are drawing up a shortlist of the first funds to add to your investment portfolio, investment platform AJ Bell breaks the available fund universe down into three categories in terms of the kinds of investments they make.

Global equity tracker funds

Funds that track the global stock market are a great way to get started in investing without having to decide on any specific region or industry.

“These funds provide low-cost exposure to companies around the world, with representation from a wide range of sectors,” said Dan Coatsworth, head of markets at AJ Bell.

Four of the best-known global equities (another word for ‘stocks’) indices are MSCI World, MSCI All Country World, FTSE World and FTSE Developed World. Tracker funds following these indices should register the same price movements (or very close to them) over any given timeframe.

Some of the most popular global stock tracker funds on AJ Bell’s platform are:

Source: AJ Bell, based on net flows from 13 April 2025 to 12 April 2026

Global bond tracker funds

If you’re looking for a more cautious approach to getting started in investment funds, you could look at bond funds instead.

“When shares fall, bonds often fall less and recover faster, helping to smooth the overall investment journey,” said Coatsworth. “That might suit someone in their 40s or early 50s approaching retirement, those already in retirement, or more anxious individuals.”

There are typically three types of bond that bond funds invest in – corporate bonds, government bonds (such as gilts) or a combination of the two (these are known as strategic bond funds).

Some popular bond funds for beginner investors on AJ Bell are:

Source: AJ Bell, based on net flows from 13 April 2025 to 12 April 2026.

Multi-asset funds

Most portfolios combine bonds and equities, as well as other types of asset. You can do this yourself by buying funds specialising in different investments, but a more convenient approach is to buy a multi-asset fund which acts as a self-contained portfolio in its own right.

“The more cautious you are, the greater the proportion you might want in bonds,” said Coatsworth. “However, there’s such a thing as being too cautious. Those with time to ride out the ups and downs of the stock market might want to avoid having too much in bonds as a proportion of their overall portfolio given the returns might be much lower than a more equity-weighted portfolio.”

Six funds for beginners

With input from Charles Stanley’s Morgan, we’ve picked out six investment funds for beginners, which we’ve shared below.

Fidelity Index World

Risk level: medium-high

A low-cost, cheap tracker fund is a great starting point to gain exposure to a market or sector, giving you convenient ownership of all or most of the companies that make up that market’s index.

Fidelity Index World is a good fund for beginners to consider because it provides a convenient tracker for the global stock market.

Personal Assets Trust

Risk level: medium-low

Personal Assets Trust (LON:PNL) is a multi-asset investment trust that sets out primarily to avoid losing money in inflation-adjusted terms (making it a less risky investment compared to funds that are more concerned with growing wealth than preserving it).

The portfolio comprises four main asset types: equities, bonds, cash and gold.

This has proved a resilient combination. The returns from each of these asset classes tend to rise and fall independently of one another, meaning that it can hold up even in changing market conditions.

Vanguard LifeStrategy Funds

Risk level: variable

The advantage of this multi-asset fund range is that it has several different funds, each with a different risk profile, so investors can select the one that best suits them.

Interactive Investor includes three in its quick-start fund range for beginner investors: 20% Equity, 60% Equity and 80% Equity, though the full range also includes 40% and 100% equity options. The remainder of the portfolio is invested in bonds.

As a rule of thumb, the higher the percentage of equities, the higher the risk profile, and the higher the potential returns.

Royal London Short Term Money Market Fund

Risk level: low

Money market funds invest your money as if it was cash, but they tend to generate returns just above the Bank of England base rate.

Interactive Investor includes Royal London’s Short Term Money Market Fund in its quick-start range, and characterises it as very low risk. This is a very cautious option: your investment is very unlikely to fall in value with a money market fund, but it’s also unlikely to grow much beyond inflation.

M&G Global Dividend

Risk level: medium-high

Dividends are the payments that companies make to their shareholders. Ultimately, it is dividend payments – or the expectation of future dividend payments – that gives shares their value.

M&G Global Dividend harnesses the power of dividend stocks, with a global perspective. It holds a wide variety of companies and could be of particular interest to investors seeking a rising income from their investments.

Scottish Mortgage

Risk level: high

Scottish Mortgage (LON:SMT) is one of the best-known investment trusts for innovation-led growth investing.

Morgan believes that anyone taking a long-term approach to investing should consider investing in a fund that looks for long-term growth through technological innovation. Their long-term perspective ought to let them ride out short-term volatility and reap the long-term rewards.

Scottish Mortgage invests in private companies like Elon Musk’s SpaceX or TikTok owner ByteDance, as well as those listed on global stock markets, offering opportunities that are otherwise hard for beginner investors to access.

The most expensive tracker funds are charging 20 times more than the cheapest alternative, potentially costing investors thousands of pounds over the longer term.

An investor with £10,000 in the most expensive UK stock market tracker fund will pay £106 in investment management fees every year, a huge premium over the estimated cost of £5 per year for the cheapest tracker fund, analysis from investment platform AJ Bell has revealed.

“It might come as a surprise, but not all tracker funds are created equal. There can be a big gulf in charges, and over time this can produce a seriously large dent in your nest egg if you happen to be invested in a higher cost tracker,” explained AJ Bell’s head of investment analysis, Laith Khalaf.

Expensive tracker funds mean investors are being “ripped off”

Bella Caridade-Ferreira, CEO of Fundscape, agrees. "There are trackers out there – Virgin is the worst – where the fees are almost as high as actively managed funds. There’s no active management in a tracker so charging active-like fees for a tracker is simply ripping investors off," she said.

Holding the cheapest tracker fund could leave the investor with a portfolio worth £19,580 after a decade, but just £17,807 if they invested in the priciest instead, a difference of nearly £1,800 - even though both funds deliver identical performance, AJ Bell’s calculations show.

The most expensive tracker funds are often at least 0.2% more expensive than the cheapest option. In some cases they can cost 0.5% or even 1% more than the lowest price alternative tracking the same region.

Source: AJ Bell/Morningstar

The report also highlighted that £10,000 tracking the UK stock market could sacrifice £1,800 in investment returns over a decade by holding the priciest fund.  

Another way to look at it is an investor holding a mixed portfolio across seven of the main investment sectors across global equity markets could be almost £9,000 better off over 10 years, based on a £100,000 investment, according to the company.

Caridade-Ferreira explained that investors assume that all trackers are cheap, but they should compare providers and make sure they’re getting the best possible price. “Fidelity and Vanguard are among the cheapest in the market and investors should always include them in their comparisons,” she said.

How tracker funds work

Tracker funds, also known as Passive funds, track a particular part of the global stock market, often a region like UK, US or European companies. Naturally, this means that people with passive funds have no opportunity to outperform the stock market.

Conversely, actively managed funds aim to outperform the market by picking and choosing which stocks to hold and normally cost more as a result.

Khalaf added that with no chance of outperformance because they invest passively, the difference in returns between comparable tracker funds will be largely dictated by fees. “It therefore makes sense for investors to seek to reduce costs where possible, and sometimes this means voting with your feet and transferring to a new provider.”

Platforms restricted from telling investors about savings

Some of today’s most expensive trackers may have first been purchased by investors many years ago and originally priced with an ‘all-in’ fee covering investment, administration and any financial advice received at the time.

However, these funds are no longer perceived as good value with their costs rising after being moved to modern investment platforms since that time.

This means that while a tracker fund may have been good value when they were taken up, that may no longer be the case and it is likely investors could switch to cheaper funds.

What makes it more complicated for investors is they may not even be aware of this and  investment platforms are not allowed to tell them.

Current rules mean that, were investment platforms to notify investors about possible cost savings on passive holdings in their portfolio, they may be deemed to have provided financial advice.

However, this could change. “The regulator is currently reviewing the dividing line between advice and guidance, and this is an example of how relaxing the rules could help investors to make better, more informed decisions,” said Khalaf.

Interactive Investor has cut the cost of its self-invested personal pension (Sipp) for small balances, lowering the monthly fee by £7. 

It means those with a pension pot worth less than £50,000 will now pay £5.99 a month for their Sipp. They previously paid £12.99.

The investment platform says it is leading a pension pricing shake-up in the UK. The move will ignite the debate between flat fees and percentage fees and the cheapest way to pay for stocks and shares ISAs, investment accounts and Sipps.

We look at how the Sipp compares to other products on the market - and depending on your balance, which pension provider is most cost-effective for you.

How Interactive Investor’s new pricing model works

“Pension Essentials” is a new entry-level subscription plan for pots under £50,000. Interactive Investor claims it is the best-value pension available on pots worth more than £15,000. 

Customers can hold funds (including exchange traded funds), investment trusts and UK and US shares in the Sipp. There is free monthly investing, while one-off trades cost £3.99. 

Once savers exceed the £50,000 threshold, they are moved onto the “Pension Builder” price plan, which is £12.99 per month. That’s regardless of whether they have £60,000 or £600,000 in their Sipp - the fixed fee stays the same.

“Our Pension Essentials subscription is designed to help people who are nearer the start of their pension journey,” said Alice Guy, head of pensions and savings at Interactive Investor. 

The company says it will alert existing customers with pensions below £50,000 so they can transfer to the new service and get better value for money.

Which Sipp is cheapest for you?

For very small pensions, Vanguard is the cheapest Sipp provider. It charges 0.15% a year. This means someone with £5,000 in their pension would pay £7.50 for their annual management fee.

A saver with £10,000 would pay £15, while someone with a £15,000 Sipp would pay £22.50.

AJ Bell is another low-cost option, charging 0.25% a year. This means a £12.50 annual fee for a customer with £5,000 in their Sipp.

In contrast, Interactive Investor’s Pension Essentials model is more expensive for these very small pots. Its annual fee is £71.88 (£5.99 a month x 12), on all balances up to £50,000.

Let’s look at a Sipp worth £20,000. Vanguard’s 0.15% fee increases to £30 a year. AJ Bell’s rises to £50. So, Interactive Investor still looks more expensive.

However, if you factor in investment trades throughout the year, a different picture emerges.

The consultancy The Lang Cat has crunched the figures, assuming portfolios of 50% funds and 50% equities with two fund trades and two equity trades per year, as well as 12 regular equity trades and 12 regular fund trades. This discounts Vanguard, as it only offers funds to invest in - it’s not possible to buy equities in a Vanguard Sipp.

For a £20,000 pot, Interactive Investor is the cheapest, at £87.84 a year. This compares to £103 (Fidelity), £108.90 (AJ Bell) and £113.90 (Hargreaves Lansdown).

For all pots between this level and £50,000, Interactive Investor continues to be the best-value - and in fact, the price gap widens as the percentage-based platforms become more expensive. For example, a £40,000 Sipp continues to cost £87.84 with Interactive Investor, but the charges levied by the three other platforms have all grown. Hargreaves Lansdown now charges £203.90 a year.

At £50,000, Hargreaves’s annual fee has ballooned to £248.90 (the most expensive platform reviewed by The Lang Cat), while a saver with a £50,000 Interactive Investor Sipp would pay just £87.84 a year.

The analysis shows that for bigger pensions, Interactive Investor’s Pension Builder plan, at £12.99 a month (or £155.88), also proves to be competitive. Savers with £100,000 in their Sipp would pay £171.84 (this includes the trades above, as included in The Lang Cat’s figures), while those with a £1 million pension pot would also pay this annual fee.

At £1 million, those with a Sipp with AJ Bell, Fidelity or Hargreaves would all pay more than £1,000 in annual fees.

According to Interactive Investor, its “flat-fee method of charging sits in stark contrast to the wider market, which is dominated by percentage fees, which sees customers paying more and more as their investment portfolios grow”.

Which other platforms charge flat fees?

Most investment platforms charge an annual fee that is a percentage of the investor’s portfolio.

However, along with Interactive Investor, a handful do levy flat fees. These include iWeb, which is owned by Lloyds Banking Group. It charges £90 a year for Sipps worth less than £50,000, and £180 for larger pensions.

Halifax Share Dealing also has flat fees - and for its Sipp, charges exactly the same as iWeb. Perhaps unsurprising given they are both part of the same banking group.

The trading fees do differ though - Halifax charges £9.50 per online trade, while iWeb charges £5.

In terms of the annual costs, both are more expensive than Interactive Investor.

What do the experts think of Interactive Investor’s new pricing model?

Experts agree that the launch offers pension savers a cost-effective and simple-to-understand option.

Bella Caridade-Ferreira, founder of price comparison website Compare + Invest, said: “With the Pension Builder Account and now the Pension Essential Account, Interactive Investor has made sure it is also competitively priced at the more modest end of the market — especially for younger people who are starting to build their pension savings. They now have every price point (or portfolio size) covered, which is disruptive.”

Holly Mackay, founder of the financial website Boring Money, told MoneyWeek that a "Netflix-style" pricing plan has its appeal. "For those starting out with a private pension, this model adds certainty and clarity, and undercuts most of the mainstream providers, particularly for those in the £20,000 to £50,000 range."

She added: "There are easier app-based journeys from some providers like Nutmeg, and low-cost ‘ready-made’ pensions from global giant Vanguard, but for those who want to learn and create their own pension portfolio, this move makes Interactive Investor a pretty compelling proposition to consider for smaller pension accounts."

Bear in mind that fees are just one factor - albeit an important one - when choosing a pension provider. Also consider the investment range on offer (is buying shares important to you? Do you want some easy model portfolios to invest in, or do you prefer a wide range of investments so you can “DIY” and build your own pension portfolio?), the customer service, how you trade investments (do you prefer to do it over the phone, or an app?), and so on. 

How frequently you buy and sell investments - and what you buy - plus whether you have other accounts like ISAs or general investment accounts with the same provider, may also affect the overall price of the Sipp, so make you look closely at all the fees, and don’t just focus on the annual cost.

The interest rates that brokers pay on cash balances in investment accounts are slowly ticking up – but as usual, they remain well behind the Bank of England’s base rate.

Hargreaves Lansdown, the UK’s largest broker, pays 1% for balances under £10,000 (1.7% in a self-invested personal pension – Sipp), rising to a maximum of 2.3% on balances over £100,000 in a Sipp.

Most other brokers such as AJ Bell and interactive investors are similar. Some are noticeably less generous: Barclays Smart Investor pays no interest on an individual savings account (Isa) or Sipp. Vanguard quietly used to pay base rate minus a small deduction, which amounted to more than you could get in any cash Isa.

However, after that got splashed all over various personal finance forums last month, the platform changed its terms and will now pay a fixed rate from later this month, initially set at 2.2%.

All of this is better than the zero that most brokers paid for the last few years (except for a few like Barclays, where clients might be well advised to grumble).

Still, many investors will wonder if there are ways to get a higher return if you’re holding a large amount of cash. And there is – but it is important to be aware that these funds are not the same as cash deposits.

Earn a better return on your ISA and SIPP cash

Cash makes a comeback In most brokerage accounts, you will be able to buy a range of funds with names such as “money market”, “liquidity” or simply “cash”.

These aim to deliver a return in line with a benchmark such as sterling overnight index average (Sonia), the rate at which UK banks and other institutions make overnight loans to each other. The funds do this by holding a variety of debt: bonds that are maturing soon, short-term loans to companies (known as commercial papers), deposits with banks and loans to financial institutions. Some of these debts may be repaid within days, others might have a maturity of a few months.

Details vary, but look at funds from big names – eg, BlackRock, Fidelity, JPMorgan, L&G and Royal London – and typically short-term loans to banks make up a large part of portfolios. That means that as interest rates rise, payouts should do so quickly as well.

For example, see the Vanguard Sterling Short-Term Money Market Fund (just because the website is clear and the 0.12% fee is low). It has 60% of its assets in bank deposits, with 40% having a maturity of less than one week. The weighted average maturity is just under 42 days. So while the fund has returned 1.75% over the past year (against 1.96% for the Sonia benchmark), averaging the last three payouts suggests a current yield of 3.2% and rising.

Short-term interest rates are now high enough that most money-market funds will pay out more than you can get in interest in any brokerage account.

Keep an eye on the costs of investing

However, you will generally pay some kind of dealing fee to your broker for buying and selling the fund. You’ll also typically pay a platform fee for holding it. These costs will vary between brokers, but you need to work out whether you’d make a meaningful gain compared to whatever interest rate your broker pays. The smaller the amount of cash you hold, the less likely you are to earn more.

Capital at risk

The big caveat is that money-market funds are not capital-protected, while cash deposits are almost completely secure (subject to the risks of the bank they are held in failing, and the limits of the Financial Services Compensation Scheme).

If the fund lends to borrowers who default, you could get back less than you invest. UK money-market funds are supposed to be conservative in terms of where they lend, and the risks are generally thought to be very low, but not zero. It is also possible that during times of market volatility, you might not be able to redeem your investment quickly. That said, all UK money-market funds made it through the severe test of March 2020 intact.

More from MoneyWeek:

• Best easy access savings accounts – March 2023
• The best one-year fixed savings accounts - March 2023
• Best savings accounts – March 2023
• NS&I Premium Bond prize fund rate jumps to 3.3%

Index and tracker funds are a multi-trillion dollar market, letting investors replicate the performance of a particular market or asset class – but how do they work?

Index funds have been around for decades. They are a low-cost way to diversify a portfolio or gain exposure to a sector or theme. Index trackers are often among DIY investors’ top fund picks as they offer value for money, low fees and reliable market-level performance.

They replicate a specific market index, such as the FTSE All-World or the FTSE 100, by holding all or a representative sample of the stocks or bonds within that index.

“Rather than attempting to beat the market, index funds aim to match it, offering predictable returns and minimal management costs,” says James Norton, head of retirement and investments at Vanguard Europe. As such, they represent a passive as opposed to active investment style.

The first ever index fund that was available to retail investors was the Vanguard 500 Fund, introduced in 1976 by Vanguard’s founder John ‘Jack’ Bogle. Bogle is often viewed as a pioneer of index investing, and nearly 50 years on the Vanguard 500 Fund still tracks the returns of the S&P 500.

They have stood the test of time, with index-tracking equity funds registering net retail inflows of £1.1 billion in January 2026 according to data from the Investment Association. They are popular both with beginner investors and with more experienced hands as they provide convenient exposure to a wide variety of assets.

Advantages and disadvantages of index funds

There are four key benefits of index funds, according to Norton. These are:

Low cost: By avoiding the high fees often associated with active management, index funds help investors retain more of their returns.

“In many areas of life, higher costs are correlated to a better product,” says Norton. “However, with investing, high cost is simply a hurdle for the manager to beat simply to break even. Data suggests that index funds outperform more expensive active funds over both the short and longer-term.”

Diversification: Broad exposure across sectors and geographies helps manage risk effectively. Investors who hold a diversely-invested index fund will by default own the best performing stocks. As Jack Bogle said, “Don’t look for the needle in the haystack, just buy the haystack.”

Transparency: With index funds, investors know exactly what they own and how it performs.

Discipline: Index funds encourage long-term investing and reduce the temptation to try to time the market.

However, Norton adds that investors should consider the following principles when investing using index funds:

• Define clear goals: Align investments with long-term objectives.
• Maintain balance: Diversify across asset classes and regions.
• Minimise costs: Prioritise low-fee index funds to maximise net returns.
• Stay disciplined: Avoid reactive decisions during market fluctuations.

What makes index funds reliable?

Index funds track an index of assets (which is why they are often referred to as ‘tracker funds’). As long as they are managed correctly, their returns will always match those of this ‘benchmark’ index.

That makes them a relatively reliable way of gaining exposure to a given market or theme, as long as the underlying index is a good representation of the market. The fund manager will ensure that the mix of assets within the portfolio reflects those in the benchmark index.

This is in contrast to active funds, where the fund manager will proactively buy and sell assets into and out of the portfolio in an attempt to outperform the benchmark.

In theory, that means investors can realise higher returns by investing in active funds than index funds for equivalent sectors, but that often doesn’t happen in reality. AJ Bell’s latest Manager versus Machine report found that just 24% of active funds outperformed a passive alternative during the 10 years to 30 November 2025.

So if investors want to allocate a portion of their portfolio to match the returns of the global stock market, their most reliable option would be a global equities index fund (tracking, for example, the MSCI World Index).

Index funds are, however, subject to ‘tracking error’, which refers to the variance between their returns and those of the benchmark index.

“Investors should check how tightly the fund tracks its index,” says Dan Moczulski, managing director at eToro UK. “The lower the tracking error, the better.”

The most popular index funds to buy now

During the first two months of 2026, these were the most popular index funds among AJ Bell’s DIY investors:

^{Source: AJ Bell, Dodl. Based on net buys during January and February 2026.}

While the list includes two S&P 500 trackers and five global stock market trackers, there is also the L&G Global Technology Index Trust which is one example of how index funds can be used to gain exposure to a specific sector or theme. The fund tracks the FTSE World - Technology Index, and as such offers investors exposure to a global selection of technology stocks.

Index funds, also known as tracker funds or passive funds, offer all sorts of benefits to investors.

While actively-managed funds can often incur high management fees for the supposed expertise of the fund manager, index funds are a low-cost alternative that offer investors convenient access to a sector or geography.

Some of the top funds that investors choose are, unsurprisingly, index funds – especially as passive funds often outperform their active counterparts.

“There is a high rate of underperformance for active investing strategies so there is a persuasive school of thought that investors should just aim to maximise returns by minimising costs with inexpensive index funds,” Rob Morgan, chief investment analyst at online investing platform Charles Stanley Direct, told MoneyWeek.

“They represent a particularly good strategy for areas where portfolio managers consistently struggle to beat the market index – often large, well-researched markets. The US market is a prime example, and investors will have done well in recent years simply to buy an S&P 500 tracker,” Morgan added.

Index funds can typically offer low costs (as well as low transaction fees due to low turnover).

Here, we’ll explore some of the tracker funds available to UK investors that carry the lowest ongoing fees, as potential low-cost additions to your portfolio.

What are index funds?

An index fund replicates the performance of a major index, like the FTSE 100 in the UK or the S&P 500 in the US.

“They do this by simply buying the same (or at least very similar) mix of investments as the index they track,” said Morgan.

“Rather than trying to beat the market, index funds simply aim to replicate it,” said Chris Beauchamp, chief market analyst at online investing platform IG. “They hold the same securities as the index they track, in the same proportions, so when the index rises, so does the fund, and vice versa.”

Low costs and more: what are the advantages of index funds?

The active versus passive investing debate is age-old. In theory, a skilled active manager will pick and choose stocks that will outperform the broader market benchmark (usually an index that a tracker fund will follow).

In reality, however, beating the market is difficult and the majority of active funds not only fail to do so but also significantly underperform. That, coupled with the fact the fees on active funds are almost always higher, means they can be an inadvisable way to invest in the stock market.

“Low costs are the headline advantage [of index funds], as annual charges are typically well below 0.5%, compared to 1%+ for actively managed funds,” said Beauchamp. “Over time, that difference compounds significantly.”

AJ Bell’s latest Manager versus Machine report, released in December 2025, showed that less than a quarter (24%) of active funds outperformed a passive alternative over the 10 years to 30 November 2025 – the lowest that metric has been since AJ Bell started running the report.

“There’s no dressing it up, it’s quite simply been a dreadful decade for active fund managers,” said Laith Khalaf, head of investment analysis at AJ Bell.

^{Source: AJ Bell and Morningstar, total return in GBP to 30 November 2025.}

Index funds aren’t just lower-cost alternatives to active funds, but they have also generated higher returns in recent years.

They are also “simple to understand, easy to buy, and inherently diversified, owning a slice of every company in an index rather than betting on individual stocks”, adds Beauchamp.

What are the disadvantages of index funds?

One of the obvious drawbacks of index funds is that, while they won’t underperform it, they won’t outperform the index they are tracking. Actively managed funds, by contrast, have the potential to beat their benchmark.

They also potentially expose investors to concentration risk, given that market cap-weighted indices become concentrated in the largest stocks.

“It is worth noting that the huge rise in the share prices of a cluster of large tech and e-commerce businesses has overwhelmingly driven the US market over the past decade,” said Morgan.

“Given the now-concentrated nature of these indices, should these stocks have a tougher time, a standard US or global index fund could struggle. You could say that investing in the US market passively has rarely been as concentrated, and therefore as risky, as it is today, and the more diverse approach of an active fund could help temper this.

12 low-cost tracker index funds to consider

Here, we’ve picked out a (non-exhaustive) selection of some low-cost index funds and exchange-traded funds (ETFs) that highlight the different kinds of exposure index funds can offer.

This information does not reflect all the fees and charges (as well as discounts) that might apply through different brokers.

^{*To 26 February 2026, via Fefundinfo}

Beauchamp highlighted VWRL, calling this “a genuine one-stop-shop for diversification” given the broad exposure across developed and emerging markets it offers by tracking the FTSE All-World Index.

^{*To 26 February 2026, via Fefundinfo}

^{*To 26 February 2026, via Fefundinfo}

^{*To 26 February 2026, via Fefundinfo}

Back at the time of the 1984 miners’ strike, Arthur Scargill, the president of the National Union of Mineworkers (NUM), was involved in another, much less famous dispute. Scargill had put the Coal Board’s pension fund under pressure to avoid investing in oil and gas companies and divest from South African mining companies – partly because the NUM wished to avoid funding competitors of British coal mines and partly out of a genuine desire not to support the South African apartheid regime.

The case went to the High Court and Scargill lost. The judge ruled that the purpose of the Coal Board’s pension and the duty of trustees was to optimise the expected financial return. They were to put aside personal views and moral qualms. The trustees’ duty to their coal miner beneficiaries was to serve the best financial interests, rather than divest assets for social reasons. “Trustees may even have to act dishonourably (though not illegally) if the interests of their beneficiaries require it,” ruled the judge.

Yet while trust law such as this still requires investment trusts and corporate pension funds to put financial returns first, much has changed in practice. The issues that Scargill wanted to take into account are now widely analysed under the banner of environmental, social and governance (ESG) investing. It is acceptable to put ESG criteria first if the manager has an explicit mandate, and some now do. However, ESG factors can be considered more widely if they potentially affect investment returns and risks.

Vast growth opportunity

Thus marketing teams at asset management companies have realised they can attract money by promoting their funds’ ESG credentials. This realisation is not unrelated to the rise of low-cost tracker funds. A decade or two ago, fund managers would tout their “star” fund managers and face-to-face meetings with corporate management. Marketing would consist of sturdy-looking classical architecture or mountains with impressive hanging glaciers. They would promote a particular fund with a record of outperformance while being required to warn in a much smaller font that past performance should not be taken as an indicator of future performance.

Despite the marketing, which was meant to convey expertise, sturdiness and longevity, active fund managers were vulnerable to what John Bogle, the founder of Vanguard and proponent of index-tracking funds, called “the relentless rules of humble arithmetic”. This humble arithmetic meant that the higher costs charged by active fund managers resulted in underperformance of the vast majority of active funds over a ten-year time period.

But “socially responsible” investing has presented active fund managers with a new way to attract inflows, while differentiating their product from low-cost index trackers. The market is huge. A report by Morningstar earlier this year on the EU’s Sustainable Finance Disclosure Regulation (SFDR) – which is supposed to improve the disclosure of sustainability-related information – suggested that funds with ESG credentials had reached €4.18trn. That equates to 46% of the overall market by assets under management (AUM).

The first set of SFDR rules came into effect in March 2021, with secondary rules that come into force this year and next. Essentially, these split green investment vehicles into two groups: i) funds that promote environmental or social characteristics (“light green” or Article 8) and ii) funds that have a sustainable investment objective (“dark green” or Article 9). But there’s no standard definition, and fund managers are allowed to apply their opinions of what investments are to be excluded to qualify as either shade of green. Article 8 funds tend to be a catch-all definition, but with tobacco and weapons excluded. More recently the list of common exclusions has expanded to include thermal coal, tar sands, Arctic oil, as well as traditional oil and gas companies. It’s always seemed a little odd to me that oil majors are the target of environmental angst from the likes of Extinction Rebellion, whereas car manufacturers and airlines are not.

ESG investing is littered with contradictions

In fact, the whole concept of green investing is littered with contradictions. A couple of decades ago, diesel cars were encouraged by government policy because carbon dioxide emissions were lower than with petrol engines. Later, attention focused on the harm caused by nitrous oxide and particulates from diesel engines – not helped by Volkswagen and other car manufacturers cheating emissions tests. More recently copper, lithium and cobalt, which are essential for electric vehicles (EV) and their batteries, have come under scrutiny. A battery-powered electric car requires at least 2.5 times more copper than a conventional car; a medium-sized truck four times as much. Yet the environmental impact of copper mining can be devastating. Currently there is a water crisis in Chile – one of the world’s largest copper-producing countries. Cobalt is even more controversial, with much of it being sourced from the politically unstable and resource rich (these two things often go together in Africa) Democratic Republic of Congo.

There is a suspicion that fund managers and corporations are investing in the same activities they have always done, paying lip service to sustainability for marketing reasons. However, you could argue that almost any activity that generates a return on capital damages some part of society or the planet. Tesla, which many see as the future of environmentally friendly transportation, was removed from the S&P 500 ESG Index over concerns about workplace culture at its California factory and the company’s safety record. Elon Musk responded by calling ESG a scam, and criticising S&P for including ExxonMobil, the world’s largest oil company, in the index.

Despite the contradictions, ESG investing now has significant momentum. Even if you disagree with the premise, then it’s still worth considering how to make the most of the trend. Buying shares in fund managers who are successfully promoting their ESG offering seems a good place to start.

An ESG stalwart

Unlike many asset managers that have more recently jumped on the ESG bandwagon, Impax Asset Management (Aim: IPX) has been focused on environmental and sustainable assets since it was founded in the 1990s by Ian Simm, the current chief executive. That long history is important, because the one moat that a fund manager has that can’t easily be replicated is a long-term record. The shares have sold off steeply from their peak of 1,508p in December last year, and are down 57% to 650p as of Tuesday this week.

Impax has been listed on Aim since 2001, after reversing into a cash-shell Kern River (which ironically was an oil company with unviable oil fields in Louisiana and California). The market capitalisation of the company was tiny; less than £5m versus £880m now. In 2007, BNP Paribas bought a minority shareholding and agreed to distribute Impax’s funds through its network. The French bank is currently Impax’s largest shareholder with a 13.8% holding.

Before the financial crisis, environmental investing came into vogue and Impax had to compete with several funds that were launched and were trying to attract inflows. However, the sector saw something of a bust following the financial crisis, as government subsidies for environmentally friendly energy projects were cut. The low oil price also undermined the prospects for renewable power sector, as some projects became unviable relative to the cheaper cost of oil. Thus the firm has shown that it can succeed through a couple of market cycles. AUM stood at £34.5bn on 30 June, while net inflows of £2.5bn in the first half (to 30 March) were as large as total AUM a decade ago.

There is a conflict of interest at the heart of fund management, as Marc Rubinstein, a former hedge fund manager turned financial blogger, points out. Investors in funds would like to maximise returns, whereas fund managers are rewarded for increasing AUM. Yet many star managers have seen performance decline as AUM grows. The solution seems to be to institutionalise management, rather than rely on star personalities. BlackRock, with $8.5trn AUM and 150 ESG funds, is almost 100 times larger than Impax and doesn’t seem troubled by diseconomies of scale.

The other concern is that the inflow of money into environmentally friendly opportunities led to a huge bubble. For example, the performance of Tesla – up 14,200% in the past decade – saw capital flow into EVs and battery firms, with euphoria reminiscent of the internet bubble from two decades earlier. Many have now fallen back to earth, down 90% or more.

Impax has not been immune to market conditions. AUM peaked at £41bn in December 2021 – of which £39.6bn was listed equities – so had fallen 17% in the first six months of the year. This was driven mainly by market movements rather than outflows. There doesn’t seem to be a large exposure to EVs or similar if you check the top ten shareholdings of Impax Environmental Markets, the group’s listed investment trust. The fund looks well diversified by geography. Large positions include US-listed Clean Harbors, which provides environmental services to industrial and automotive customers (up 12% year to date). The largest UK holding is Spirax Sarco, the engineering and peristaltic pumps company, which is down 28% year to date, but is an established company. In short, the investment process looks sound, and is not weighted towards unproven environmental technology.

Impax shares are currently trading at just below 16 times forecast earnings for the years ending September 2022 and 2023. An alternative measure for asset managers is market cap/AUM, which is 2.4% (suggesting the shares are good value versus a past rule of thumb of 4%). Impax executives also seem to believe the sell-off has presented an opportunity. At the end of June, finance director Charlie Ridge bought 100,000 shares, worth more than £650,000 at today’s price. Founder and CEO Simm still owns 7.2%. I’ve owned the shares since 2016, and though I sold a few at 1,299p last September, I think the prospects look bright.

As inflation continues to rise, it’s good to see that prices aren’t going through the roof everywhere. The launch last week of Dodl, a low-cost app-based service from stockbroker AJ Bell, marks the latest round in a price war between investment-platform providers – some welcome good news for savers and investors.

AJ Bell expects some customers to use Dodl as a general investment account, but, as with rival platforms, it also offers individual savings accounts (Isas) and self-invested personal pensions (Sipps). So this could be a good way to get started with long-term saving and investment, including for retirement planning.

Competing with Vanguard

Dodl has an annual charge of 0.15%, with a monthly minimum of £1, and no additional charges for buying or selling investments on the platform. That’s excellent value, but it won’t replace existing platforms for most investors (including users of AJ Bell’s Youinvest service), since it provides a very limited choice of investments. Dodl will offer access to seven AJ Bell multi-asset funds, 23 index funds covering global stockmarkets and a range of investment themes, and 50 UK shares.

That puts Dodl very much in the territory of Vanguard, the American investment giant that launched a low-cost platform in the UK a couple of years ago. This too offers a single annual fee of 0.15% for access to a limited selection of investments: in Vanguard’s case, only its own funds are available.

The only other platform that comes close to matching Dodl’s pricing on an Isa is Freetrade, which charges £3 a month. It also offers commission-free trading in a much broader range of investments. But while that price equates to an annual charge of just 0.18% on a £20,000 Isa, Freetrade’s Sipp comes at the higher monthly cost of £9.99. That makes it more expensive than Dodl or Vanguard for those who have built up smaller pensions.

So for investors looking to open their first Sipp – perhaps because they don’t have access to a pension scheme at work, or because they want to increase retirement saving – Dodl looks like a good option. It matches the cost of the cheapest Sipp (Vanguard) on the market, but offers a broader – though still limited – choice of investments.

Hoping for more choice

Dodl focuses on passive funds, which track a stockmarket index rather than trying to beat it, so it won’t suit anybody looking for active funds. Still, the platform gives investors exposure to all the main developed stockmarkets, as well as several emerging markets funds. There are also bond funds, and some sector and thematic products, although a few of these seem arbitrary – there is a robotics exchange-traded fund, but no trackers for core sectors such as energy or consumer staples, and no gold. About half of the 50 shares available are solid blue chips, but many popular FTSE 100 firms that would help build a balanced portfolio are left out, even though the list includes plenty of volatile mid caps.

The list will evolve – US stocks are on the radar – so hopefully this will improve. In any case, more competition is very welcome and this is a promising product. In terms of pensions, Dodl follows Interactive Investor’s launch of Pension Builder earlier this year. With a fixed monthly cost of £12.99, it was also marketed as a low-cost option, but if you don’t have a six-figure pension fund, Dodl will be cheaper.

• SEE ALSO: A new low-cost Sipp from Interactive Investor

The road to hell is paved with good intentions. Fears of global warming have created massive enthusiasm for “green investing” over the past few years. Industries that furthered the goal of cutting emissions – such as renewable energy – have found it easier to raise capital. Financial institutions have allocated more money to environmental, social and governance (ESG) strategies in general. Funds claiming to follow ESG principles now manage $6.1trn, representing 10% of worldwide fund assets, mostly in Europe.

Asset managers have shown that they are willing to use their power to structurally shift our economies. The five largest investment managers – BlackRock, Vanguard, UBS, State Street and Fidelity – hold a combined $22.5trn in assets, giving them an enormous amount of clout if they act together.

Last year we saw an example of them doing so, when several backed an activist hedge fund in voting three directors off the board of oil major Exxon Mobil. Meanwhile, banks and insurance companies are making “net zero” commitments not just at company level but also at the portfolio level – which is affecting where they are willing to invest and lend.

There is an obvious problem with this. Many of the industries being shunned by ESG-conscious investors and lenders remain crucial to the way the world works. Sectors that emit large amounts of carbon dioxide (directly or indirectly) include energy, mining, heavy industries such as metals and chemicals, farming and transport. We may not like this, but we can’t immediately replace them: 80% of the energy consumed in the world is still generated from fossil fuels.

The consequence of several years of lower investment in these out-of-favour sectors was already becoming apparent in the second half of 2021: the Bloomberg Commodity Spot index hit an all-time high in October as rising demand collided with tight supply. The Russian invasion of Ukraine brought matters to a head.

We need affordable, secure energy

Investment in oil and gas has been depressed over the past six years and discoveries are at the lowest for the last 75 years, according to Rystad Energy, a Norwegian energy-intelligence firm. Surging oil and gas prices have huge consequences financially – Citigroup estimates the primary energy bill for Europe will reach $1trn this year, close to the record levels of 2007 and 2011. It also has both energy security and environmental implications.

The UK and Europe have to import liquefied natural gas (LNG) from the US – gas that was produced using highly polluting fracking techniques. Reducing European reliance on Russian oil and gas will require intensive capital expenditure in other geographies, not least because all types of oil are not the same and supplies need to be matched to refinery capacity – light, sweet (low-sulphur) crude is easier to refine than heavy, sour (high-sulphur) oil.

Despite the obvious need for more investment and the likelihood that oil prices will remain elevated, the shares of European oil majors have remained flat since the beginning of the year, unlike their American counterparts. That may reflect their exposure to Russia, but also probably, at least in part, the fact that oil is now a taboo sector for some increasingly ESG-conscious investors – ie, today’s equivalent of tobacco.

Firms such as BP and Total offer interesting value in a world where energy is more scarce. However, the most risk-seeking investor may look at the extremely cyclical offshore oil drilling sector, where consolidation is under way and major companies such as Odfjell Drilling and Maersk Drilling should emerge stronger. Canada’s oil sands produce some of the world’s most carbon-intensive crude, but shares of Imperial Oil and Canadian Natural Resources are rising, reflecting renewed interest from investors in the sector.

Of course, it’s not just oil. The transition to die Energiewende (a long-term renewable energy and climate strategy) favoured by Germany has been close to a disaster this winter. Back in October, several European countries warned of potential blackouts and electricity prices shot up due to low wind power generation.

Prices of natural gas for gas-fired power stations – the back-up for wind – soared as well, and stocks fell to all-time lows. The uncertainty of whether Russia (which supplies 40% of Europe’s gas) could turn off the tap at any moment has really demonstrated the fatal flaws in European energy policy.

On the European continent, some factories had to stop or limit production – compounding supply-chain issues – while others began acquiring their own fuel generators to get off the grid immediately. Poland took a different approach.

The government decided that it would continue to exploit the Turow coal mine near the border with the Czech Republic – and would ignore a €50,000 daily fine levied by the European Union to do so. Coal and cheap but highly polluting lignite (brown coal) generates 75% of Poland’s electricity, and the transition to nuclear energy will take some years.

Poland is not the only country deciding that it would rather increase pollution than run short of energy. China, which has tripled its production of coal since 2000, announced a ban on coal exports and is increasing investments in mining to ensure energy security. The reality is that annual world coal consumption still stands at 8.5 billion tons and has not declined much in recent years.

That is why miner Glencore is betting that coal will still be relevant. Its share price is up by 50% year on year as investors come round to the same view. The other big winner may be nuclear energy, which provides about 30% of the world’s low-carbon electricity. France and the UK are both now planning to expand their nuclear capacity to produce carbon-free electricity and meet climate objectives.

This will benefit uranium miners such as Cameco and Energy Fuels. In contrast to coal – which is hard to greenwash – nuclear is undergoing a makeover. The EU now plans to label some nuclear projects – and even some gas ones – as green. You can argue about whether any power that leaves toxic waste to be stored for thousands of years can really be environmentally friendly, but this decision illustrates both the limits of ESG semantics and the risks to our economies of running out of affordable energy.

An electric economy

still needs metals Meanwhile, metals such as aluminium, copper and zinc have all reached elevated levels. Some of this is due to speculation and more recently to sanctions on Russia, and these levels may not be fully sustainable, but there is a real lack of supply. This has been exacerbated by rising demand for some metals caused by the electrification of the economy – another key green theme where the impact on raw materials has been underestimated.

Large miners such as Rio Tinto, BHP and Glencore offer exposure to various metals. Other peers look even cheaper. Anglo American trades on an enterprise value (EV – market capitalisation plus debt) of only 4.1 times earnings before interest, tax depreciation and amortisation (Ebitda) and carries nearly no debt. It regrettably spun off its coal business, Thungela Resources, under ESG pressure last year.

Thungela’s share price has shot up fivefold since its initial public offering in June. Glencore shareholders should probably hope that their company can resist any similar pressure to get rid of its coal operations. Many other miners are also trading at depressed valuations – for example, Nexa Resources, which extracts zinc in Latin America, is on an EV/Ebitda ratio of three and generates 28% Ebitda margins.

Though gold and silver pulled back last year because markets expect a series of increases in interest rates, prices are now resilient and gold miners are priced extremely cheaply. Many are poorly managed and operate in difficult geographies (such as Mali, Peru and Russia), but some generate healthy and steady cash flows. I favour Barrick Gold.

Makers of metals such as steel, aluminium or zinc have different dynamics to miners or energy – their fortunes depend on whether demand and prices for their finished products outstrip raw material costs (metal ores and energy). If we start to see shortages in output here at the moment, it’s not – broadly speaking – about a shortfall in capacity, but rather a shortage of affordable inputs (specifically energy, which is hurting many producers in Europe).

Nonetheless, the market value of steel companies is historically broadly correlated to commodity prices, according to consultancy McKinsey, albeit to a lesser extent than primary producers (there’s a 64% correlation for the steel sector, compared with 84% for oil and gas, and 93% for miners). Steel makers such as ArcelorMittal and Ternium are seeing their shares rally, yet trade at EV/Ebitda ratios of less than two, while generating strong profit margins. This is a notoriously cyclical industry and investors are right to treat it with caution – but today’s aversion to energy-intensive, carbon-spewing sectors may still leave it cheaper than fundamentals would suggest.

Conditions are hurting aluminium producers more: aluminium smelting is extremely energy intensive (and carbon intensive) and so rising energy prices have slashed margins. Unable to fully pass on prices, producers have been shutting down some capacity, which was already leading to tighter supply. The war in Ukraine has now upended matters: Russia is the second largest producer of aluminium outside China, with around 6% of global production, and this may be taken out of the market due to sanctions. Thus shares of efficient producers such as Alcoa, which had been steadily recovering from its 2020 lows, are holding up despite the headwinds.

How gas prices caused a fertiliser crisis

Refineries and petrochemical plants are not the ESG investor’s best friend, either: they take in oil or gas and produce a range of often polluting products. These sectors are often ignored, in part because they are complex. As with metals, returns depend on input costs (eg, oil or gas feedstock) and demand for the products they produce. Prices and margins on some products tend to be fairly closely linked to oil or gas prices; for others, the connection is looser. Local conditions can play a big role: US refiners such as Marathon Petroleum and Valero Energy are doing well now, because the Ukraine crisis has pushed up global prices for products such as diesel (which can be traded internationally), even while US prices for natural gas – a key cost – remain much lower than for European refineries. Petrochemical producers tend to suffer more from high oil and gas prices: the shares of European firms such as BASF and Evonik are now holding up noticeably worse than US firms such as Dow and Dupont, because the latter again enjoy lower feedstock costs. In general, companies producing complex and specialised chemical products generate higher margins (and are more attractive to investors), which explains last week’s move by Belgian firm Solvay to split into two companies: one focused on basic chemicals considered as commodities and the other focusing on speciality chemicals.

There are opportunities for knowledgeable investors to take advantage of input and output price trends, but one product stands out as more crucial than others right now. The rising price of ammonia – made from natural gas and hence hit by higher gas prices – has led to quintupling of fertiliser prices. That will affect food production. Food prices have already increased by 22% in 2021 according to the World Bank, and they are not likely to fall back this year given prices of fertiliser and seeds. Crops such as wheat and maize require regular fertilisation – too much, in many cases. The UK, for example, consumes 100kg of fertiliser per acre, according to the United Nations Food and Agriculture Office – 60% more than in the EU. The efforts made in Europe to reduce usage of fertiliser to preserve the environment and protect aquifers from run off have been considerable, but farmers do not have much room to cut consumption further, especially if they are trying to keep crop yields up.

Indeed, farming is surprisingly a major source of pollution: it is responsible for 17% of global carbon emissions. In Europe, the sector has been hit by heavy environmental regulation, and two years ago the EU agreed to reform farm practices further as part of its drive to hit net zero by 2050. The changes would have led to a further cut in production. Soaring food prices and geopolitical threats will reportedly cause those plans to be reassessed, with greater focus on food security. If so, it will be yet another example of how hard it is now proving to square going green with continuing to meet the world’s essential needs

Interactive Investor’s new low-cost pension plan could kickstart a price war in the sector. The investment platform is launching Pension Builder, a new self-invested personal pension (Sipp) for which savers will pay a flat fee of £12.99 a month, however much their fund is worth.

Flat fees tend to work out better value than percentage-based charges on larger pension funds. But Interactive Investor’s fee is low enough to be competitive for smaller funds, too. Analysis from Compare the Platform suggests that on a pension fund of £50,000, only Fidelity Personal Investing and Vanguard would work out cheaper – though the latter offers a more limited choice of underlying investments. On pension funds of £100,000 or more, Interactive Investor moves into the lead.

Interactive Investor’s new pension is designed to appeal both to savers just beginning with pensions and to those transferring from rival platforms. For the latter there is an opportunity to save money straight away, while for first-time pension savers, the £12.99 monthly fee will work out more expensive than some plans in the early years, before saving money later on.

Game changers

The launch exemplifies how investment platforms have changed the game for savers opening individual plans rather than (or as well as) contributing to a work-based pension scheme. Most platforms offer access to the same range of underlying investments – basically any collective investment fund, as well as direct equities – and functionality such as research and planning tools. What you’re looking for is the cheapest deal for your level of savings.

Missing out on the best pricing can have a large impact on your pension’s value. Each pound paid in charges is a pound you can’t invest or earn compound interest on.

Research from analyst Lang Cat, based on a 35-year-old with a £100,000 pension pot who invests £10,000 a year for 30 years and earns an annual return of 5%, suggests the cheapest plan today would deliver a final pension value of £1,191,737. At more expensive providers, the same saver would end up with up to £53,000 less due to charges.

Making comparisons between platforms is not straightforward. They charge in different ways – some favour flat cash fees while others charge a percentage fee. These platform fees are not the only charges to consider. There will also be charges to pay when you make new investments or change your portfolio, and for other services. Like many plans, Interactive Investor charges for things such as dividend reinvestment.

Comparison sites such as Compare the Platform or Money to the Masses allow you to make comparisons according to your circumstances – how much your pension fund is worth and how you plan to invest, for example. This should give you a better idea of the best deal for you, instead of just headline charges.

Nevertheless, Interactive Investor’s new launch is a welcome addition to the pensions marketplace, providing stiff competition to the likes of AJ Bell, Fidelity and Vanguard. It should also give savers pause for thought. Alongside the launch, Interactive Investor consumer research found only 12% of savers look carefully at pension charges. The rest are at risk of blowing an unnecessarily large hole in their pension funds.

On the last day of 2021, the world’s most-listened-to-podcast on Spotify, The Joe Rogan Experience, aired a three-hour deep-dive interview with Dr Robert Malone, an early developer of the mRNA technology used in Covid-19 vaccines.

Malone has more recently been widely criticised for spreading disinformation about virus vaccines and the interview came just days before Malone’s Twitter account was suspended with the social media site citing violations of its Covid misinformation policies.

As is often the way with a Rogan interview, the conversation struck a public nerve and went viral. To say the interview was divisive would be an understatement. But it’s not what Malone said about vaccine policy which drew the attention of the serious people of ‘finance Twitter’.

It was Malone’s reasoning as to why the pharma companies might be operating irresponsibly. “The overlords that own them,” Malone told Rogan, “BlackRock, Vanguard, State Street, etc, these large massive funds that are completely decoupled from nation states have no moral core. Their only purpose is return on investment. That is the core problem here.”

For many of those who like to use social media to share market and economic insights, the statement seemed absurd. To suggest that BlackRock or Vanguard, which make their daily bread and butter from managing the assets of pension funds, unions and many more, were an omnipotent but malevolent force was misguided. The observation instantly implied Malone had major credibility issues.

Yet, when you unpick Malone’s statement, an iota of truth rings out. The structural reality of modern corporate control tends towards oligopoly. It may just have gone insufficiently scrutinised due to its sheer obviousness.

It’s not controversial to say that passive fund providers have too much power

In one way or the other — mostly via the shareholder votes they control — BlackRock, Vanguard and State Street, really do influence nearly $20trn of assets and as a result also the corporates that issue them.

Yes this influence is rendered in our names. But there’s a solid argument that this type of mass delegation of interest, especially via passive investment vehicles which dominate BlackRock and Vanguard offerings, could unwittingly be constraining the usual incentives that keep capitalistic economies in check.

The idea that index investing specifically may be warping capitalism isn’t new. One of the most prominent voices to have made the case that index funds could be worse than even communism was broker Sanford C. Bernstein & Co in 2016.

A note from the broker at the time observed that “a supposedly capitalist economy where the only investment is passive, is worse than either a centrally planned economy or an economy with an active market led capital management”.

The theory went that if investment flows to industry occurred on a very broad-brush and passive level, bad companies would go unpunished while good companies would have little to no incentive to keep adding value.

Eventually the incentive to try and outperform each other would disappear — a fact that could encourage potentially collusive practices that did little to add true economic value.

In recent years the environmental, social and governance (ESG) investing trend has come to address some of these potential misallocations. Even so, in being outcome- rather than profit-driven, ESG too has failed to address the collectivising forces that are skewing corporates towards maximising rent extraction above all else.

This raises other uncomfortable truths. Since the world’s largest asset managers disproportionately represent the wealth of older generations, they may also have an interest in encouraging corporate behaviours that favour those generations over younger ones. Maximising rents that can be drawn from younger generations at any cost may be the unwitting result.

In light of what is now being called the Web3 phenomenon, which aims in its own unique way to revive active personal management through new types of blockchain-based mutual structures, it’s an important point to dwell on for markets.

What might happen to valuations if and when users begin to understand the true power that resides in their personal engagement with corporates, both in terms of consuming their services and investing in their future growth? How might early-stage capital formation be impacted?

BlackRock’s recent decision to give a number of institutional clients the right to proxy vote on their stock holdings is just one indication of powerful democratising forces being afoot in the modern marketplace. Voices like Malone’s may be too simplistic and extreme on the issue, but they do offer an important insight into a fast-changing zeitgeist.

For more from Izabella, go to TheBlindSpot.com.

And for more on the topic of shareholder democracy, read Merryn’s new book, Share Power.

Before we get started this morning, just a reminder to fill in our survey on your investing and trading habits.

It’ll help us to get to know you better – and you also get a chance to win a £1,000 Amazon voucher! So if you have 15 minutes to spare, it’d be great if you could let us quiz you.

How financial advice has changed since the bad old days

Few innovations have changed investing for “normal people” as much as the passive fund (also known as “index” or “tracker” funds). The group most responsible for driving this innovation forward is arguably asset manager Vanguard, which popularised indexing fund under its founder, the late Jack Bogle.

Active fund managers try to beat the stockmarket. They charge a lot for doing so. Unfortunately they don’t usually manage to beat the market – and then you have to pay the fees on top. Passive funds just copy the market. They don’t do anything clever, so they’re cheap. Add it all up, and chances are, the average investor will be better off in a passive fund than in an active one.

You’ll note that the key insights here are nothing to do with investment strategies. Instead, it’s all about simplicity and cost. You get the average return, but you pay below average fees. In avoiding the temptation to do anything too clever, and by controlling the one thing you can control – your cost of investing – you dramatically raise your odds of achieving a satisfactory outcome.

Now Vanguard is applying similar logic to financial advice. But before we talk about that, we need a bit of context. The financial advice market in the UK has changed greatly in the last decade or so.

In the old days (before the end of 2012), independent financial advisers (IFAs) were able to fund their business via commission, so you wouldn’t pay an upfront fee for financial advice. Instead, the IFA would recommend products, such as funds, to you. You would buy those products because your IFA had recommended them to you. The IFA would then get paid commission from the fund manager.

If you’re gawping at this concept because you’re young and you don’t remember the olden days and you can’t believe that anything this blatant could happen, then please let me assure you that it did.

The entire industry (with some admirable exceptions) would swear blind that this did not represent a conflict of interest, even though the funds that paid the most commission were – strangely – the ones that got recommended (this is one reason why investment trusts – which were never able to pay commission – struggled to find a place in the average private investor’s portfolio.)

It’s something that we endlessly complained about here at MoneyWeek. And thankfully, the regulator, under the Retail Distribution Review (RDR), eventually put a stop to commission (in most cases).

What does Vanguard’s new financial advice service cost?

Today, advisers have to present their charges clearly, and they have to be better qualified. However, fees can still be pretty tricky to understand (try comparing charges between IFAs and you’ll soon see).

Also, financial advice is not cheap. That was always the case, but now that it’s clear, and now that advisers have more regulations to follow and require more qualifications, anyone who has less than at least £100,000 in investments and savings will struggle to find an adviser who’ll take them on.

The rise of robo-advisers tries to plug this gap in the market by having sets of fund portfolios that you can invest in based on your risk appetite.

But now Vanguard has launched a service which is something of a logical next step. The Vanguard Personal Financial Planning service is open to investors with at least £50,000. Investors will get personalised advice on their retirement savings for a fee of 0.79% a year. That includes fund fees, trading costs, and platform charges. And there are no entry or exit fees.

This is extremely good value. Typically, as the situation stands, you’d be paying an adviser, and then you’d be paying fees for your funds on top of that. In all, you could quite easily be paying twice the Vanguard fee or even more.

That makes a big difference. As Vanguard’s own figures suggest, if you had a £250,000 portfolio growing at 5% a year, then over 30 years you’d make an extra £275,571 by paying 0.79% rather than 2% annual fees.

To be clear, Vanguard’s service is not the same as that of an IFA. For one thing, it can only offer Vanguard products (an IFA will look at suitable products from across the market). For another, it’s only about retirement savings. So you’re not going to get advice on life insurance or income protection or those aspects of planning that you’d expect from an IFA.

However, given that lots of advisers these days will put you into passive funds (because they’re the obvious choice and low risk from a regulatory point of view), the “restricted advice” aspect of Vanguard’s offering is not really a disadvantage.

As for other aspects of planning – for the level of wealth Vanguard is aiming at here, your needs are unlikely to be especially complicated. An afternoon sitting down with Google and a few comparison sites could probably sort most of those things out for you pretty rapidly.

So what do you get from Vanguard? It’s a tiered service. At the £50,000 starter level, you put your details into the Vanguard website and it creates a financial plan based on your goals and your risk appetite.

Vanguard will pick the funds for you. These will be entirely from its own range, but the available tracker funds cover all the major equity and bond markets you’d need (including index-linked bonds and cash equivalents).

Those with £100,000 or more (generally the minimum that you’ll need to get a more traditional IFA) will be able to talk to a team of financial planners. Those with upwards of £750,000 will have a dedicated financial planner.

The real breakthrough here is the transparency

This looks like great news to me. Vanguard already provides products that will work fine for most people’s core holdings. So if you aren’t someone who wants to spend a lot of time worrying about where to invest (and not everyone does), and you do need the reassurance of an adviser, then this is a good solution.

Yes, you can argue that if your finances on the investment side are straightforward enough to go for the Vanguard option, then you could probably just run them yourself. But not everyone wants to do that.

And yes, the more money you have, the more likely it is that you will need more complicated planning advice (though you could bolt this on), or that you might want to put money into assets where you will genuinely benefit from quality advice.

(An aside: to be clear, I’m not talking about elaborate tax planning here. That was never a great idea and these days, anything that smacks of a loophole or a grey area can be retrospectively shut down in any case, so it’s a waste of time and will turn out to create you far more headaches and stress than it takes away. I’m more talking about things like investing directly in businesses that you’re interested in, or agriculture, or something else that involves more engagement than simply being a shareholder in a public company.)

But even if you’re a more engaged investor, paperwork is no fun. As Holly Mackay of Boring Money puts it: “at 0.79%, to have a... service which maximises your tax allowances, does the juggling between Isas and pensions for you, keeps an eye on future nasties such as the Lifetime Allowance, and provides regular access to people on the phone if you have more than £100k invested – that’s interesting.”

And it might well open people’s eyes as to just how much financial advice is costing them. One thing that Vanguard has always done well is transparency – one figure that covers everything is a real rarity in financial services and it might be the best thing about this launch. You can see what Vanguard offers as a benchmark. You can then look at what your IFA is doing on top of that – if anything – to justify their extra costs.

In the end, the reality is that a lot of people find investing and saving and money in general intimidating. This level of gentle, transparent hand-holding is something the industry badly needs (and if you know someone like that, why not buy them a subscription to MoneyWeek – our goal is to demystify this stuff and explain finance in plain English.)

If you want to invest money in the stock market, there are various ways to go about it. You can buy shares in individual companies, but this involves doing lots of research and, ideally, having a solid grasp of how to read and analyse a set of accounts.

Investors who lack the time, knowledge, or inclination to invest in individual companies often use funds instead. This can be anything from using tracker funds or a traditional actively-managed fund. The latter involves you and lots of other investors handing over your money to a fund manager or team of fund managers, who invest your money in a wide range of companies.

The goal of the active manager is usually to “beat the market” – for their fund to deliver a better return than the wider market. For example, a fund manager investing in a basket of London-listed stocks might choose shares with the aim of beating the FTSE 100, the UK’s main stock market index.

There’s just one problem: countless studies have shown that the majority of fund managers fail to beat the wider market consistently over the long run.

This is where tracker funds come in.

What is a tracker fund?

Tracker funds (also known as index funds or passive funds) aim to track the performance of a particular index, such as the FTSE 100 or S&P 500. The funds may hold all, or a representative sample, of the stocks in the underlying index (physical replication), or replicate the performance of the index via buying derivatives (synthetic replication).

The aim is to have as low a tracking difference (the gap between the performance of the index and the fund) as possible. Since the goal of a tracker is to match the index, significant outperformance is as concerning as significant underperformance (even if it might not feel like that to an investor), because it suggests problems with the way the fund is being run.

Tracker funds can be traditional open-ended funds (unit trusts or open-ended investment companies [Oeics]) or exchange-traded funds (ETFs) listed on a stock exchange. Investment trusts are almost never used as tracker funds because – unlike ETFs – they have no mechanism to keep the fund’s share price in line with the value of its assets.

The first tracker open to ordinary investors was the Vanguard Index fund, which launched in the US in 1975. Rivals were sceptical as to whether it would ever succeed, arguing that people wouldn’t be satisfied with merely matching the market, but the concept caught on.

What are the pros and cons of tracker funds?

The big advantage of passive investing is cost: a FTSE 100 tracker fund can have an annual charge of well under 0.1% a year. An actively managed fund could easily charge ten times as much, with no guarantee it will beat the index (most don’t over time). A closet tracker is an active fund that sticks close to its benchmark index to avoid underperforming the market too drastically (and thus losing clients). Investors in a closet tracker are being charged the higher fees of active management in exchange for passive performance, or worse.

Exchange-traded funds (ETFs) have, by and large, had a good crisis. These baskets of securities (versions range from equities and bonds to futures and commodities) track an underlying index and are traded like shares on a stock exchange. They have mostly replicated the ups and downs of the major indices faithfully.

Many corporate-bond ETFs, however, haven’t. The concern here has long been that although corporate-bond ETFs are highly liquid and hence easy to trade in and out of, the actual bonds held in the portfolios are a good deal less liquid. So investors might find it easier to sell the liquid assets (the ETFs) rather than the less liquid underlying assets, opening up pricing mismatches.

A gap emerges

Consider the Vanguard Total Bond Market Index Fund ETF (BND), a hugely popular $55bn US bond ETF. It contains some of the most liquid corporate bonds available. Nonetheless, in recent days the spread between the ETF and its benchmark has reached 3%.

The idea of a mismatch between the price of a fund and the underlying assets isn’t news to anyone who invests in investment trusts, for instance, where discounts open up all the time – but ETFs were supposed to be a more efficient structure. Put simply, major investors known as authorised participants would swoop in to trade the underlying basket of bonds or stocks in an ETF and narrow down that discount. But this is not happening. And that’s because the underlying bonds are not, in truth, that easy to trade in and out of.

The problem isn’t confined to America. Tom Eckett of industry news site ETF Stream (where I am executive editor) reports that, using data from Bloomberg, “the $7bn iShares USD Corp Bond UCITS ETF, one of Europe’s largest ETFs, was trading at a 7.5% discount to its net asset value (NAV) on 12 March as liquidity dried up in the corporate bond market”.

The problem here is that index companies and the market makers behind the ETFs have different ways of valuing bonds. Index providers measure from the middle of the market (the midpoint between the bid, or the highest price a buyer is willing to pay, and the offer price, the lowest a seller is willing to accept).

Meanwhile, the market maker may well value the bond closer to the bid price, reflecting its view on what the realistic price is if you want to sell a bond. That means you get a disconnect between what the NAV providers are saying and what the market makers are saying. The upshot is often that the market price of an ETF (heavily influenced by market makers when investors are jittery and liquidity is poor) will tend to trade at a discount to the reported NAV (which is calculated by the index providers). In a way, it is a good lead indicator for what is happening with underlying credit markets. Usually these gaps don’t last long. But in periods of turmoil they can appear quickly and persist. It only matters if you need to sell the ETF – which is exactly what happened to so many investors a few weeks ago.

Leave leveraged bets alone

The market turbulence of the last few weeks has been especially punishing for ETFs that leverage up or down the movement of a key benchmark. Normally ETFs track the securities in the underlying index on a 1:1 basis, but the leveraged ones will give you twice or three times the return (or loss). If these trades go wrong, the results can be catastrophic, as investors in two three-times (3x) leveraged oil products discovered.

A clause in their rules was triggered following the plunge in oil prices. The WisdomTree WTI Crude Oil 3x Daily Leveraged and the WisdomTree Brent Crude Oil 3x Daily Leveraged ETFs were suspended on 9 March as they breached the “severe overnight gap event threshold”.

That gives the issuer the option to close something called the swap, which is built into the product; this shuts the fund down. In this case the trigger was a 20% price move.

If you have no strong views on where to invest, a cheap passive fund that tracks the whole market is a sensible place to begin. So to build a global portfolio of equities, the obvious starting point is an index such as the MSCI World and the FTSE World. But when you look at the details of these indices, you might wonder if they accurately reflect where you want to invest.

Take the enormous weighting in US stocks, for example (64% of the MSCI World). Or the absence of any emerging markets (EM) – nothing at all in the MSCI World, which is developed markets (DM) only, and only a small part of the MSCI AC World (China, the largest, is just 4%). You may feel that neither of these are consistent with how the global economy works.

Yesterday’s economy

And you’d be right to question that. The US accounts for around 25% of global GDP, while EMs comprise about half. This is not yet reflected in global market indices, partly because DMs tend to have larger and more liquid stockmarkets: more firms are listed, and the free float (shares that are not owned by governments or other controlling shareholders and are available for investors to buy) is typically much higher. But it is also due to valuations: the US now dominates global indices partly because valuations there are so high.

To get a benchmark more in line with the size of the global economy, we could weight by GDP instead. Would that improve performance? MSCI calculates a GDP-weighted index version of both the MSCI World and the MSCI EM. The EM one has beaten the standard index by 1.7 percentage points per year since 2000. The DM one is still ahead overall since its inception in 1969, but has lagged badly over the last ten years because the US beat other developed markets by a large amount over that time. That may continue – but the example of Japan in the late 1980s (when it briefly accounted for more than 50% of global market capitalisation) suggests it could one day reverse dramatically (see chart above).

GDP weighting wins out

If so, GDP weighting could again be better than market-weighting. There are no broad GDP-weighted ETFs – a fund with such poor performance over the past decade would be tough to launch. But a handful of regional funds would build something similar. For example, with five Vanguard ETFs – FTSE North America (25%), FTSE Developed Europe (25%), FTSE Japan (7.5%), FTSE Emerging Markets (37.5%) and FTSE Developed Asia Pacific ex Japan (5%) – you could get most markets closer to their GDP weights, at a total annual cost of 0.18%.

Good news for pension savers worried about charges – as all pension savers should be. Vanguard, the giant US asset management company, is set to launch the UK’s cheapest-ever pension fund.

Vanguard has been promising a new pension product for more than two years. But the long wait appears to have been worth it. The group’s self-invested personal pension (Sipp) will carry an annual fee of just 0.15%, with charges capped at £375. That’s less than half the cost of similar Sipps elsewhere.

Savers opening a Vanguard pension will have to pay additional charges on the underlying funds in which they invest, as well as transaction costs when buying and selling investments. But that’s true of other Sipps too and independent analysis suggests that for the typical saver, Vanguard’s new product will be the cheapest deal going.

Pension advisers expect the new plan to be popular, which should prompt rival providers to review their own charges. In which case, fees could drop across the board in 2020 – and if you already have a Sipp, it’s worth reviewing the market to see if you’re getting the best deal.

Next year Vanguard, the world's second-largest fund manager, is launching Britain's cheapest private pension to date, "throwing down the gauntlet to its competitors and fuelling expectations of a price war", says Emma Agyemang in the Financial Times. The self-invested personal pension (Sipp) will have an annual administration charge of 0.15%, capped at £375. That is far below the industry average of 0.35%, says independent analyst Platforum. There will also be no additional costs for exit fees, valuation statements or transfers.

Vanguard says the Sipp will initially only be available to people who are building up their retirement savings, not those that have already started drawing on them. A pension drawdown service is expected to launch in the next tax year. Someone putting the full £40,000 annual pension allowance into the Vanguard Sipp would pay £172 a year in charges. The same amount in a Vanguard fund held in the most expensive platform's Sipp would cost up to £400 a year.

"Compounded over decades of pension saving, these fees can add up," says Louise Cooper in The Sunday Times. A 43-year-old investing £40,000 for the next 25 years would save almost £10,000 with Vanguard's Target Retirement fund if invested with Vanguard's Sipp instead of a higher-cost platform.

Two years ago Vanguard introduced an Isa and investment platform "credited with starting a price war that has forced [rivals] to push down their costs", says Cooper. "The Sipp, which promises to let savers sign up in just ten minutes, could shake up the market again by forcing another reduction in costs."

Vanguard's funds are cheaper too

There's more good news. Vanguard has some of the lowest fund fees in the industry. A typical Vanguard fund comes with an average fee of 0.2%. Hargreaves Lansdown, the biggest investment platform, charges an average fund fee of 0.94%. Note too that the account-fee cap applies across all the products you hold with Vanguard, whether that's a Sipp, Isa, or a general account.

The drawback to the Vanguard Sipp is the choice of funds. "It only offers a limited own-brand selection," notes Jayna Rana on This is Money. Hargreaves Lansdown charges more a 0.45% management fee plus fund fees and some dealing charges but offers a full range of funds, investment trusts and UK and international shares.

Some investors will pay more in order to get access to a far wider choice of investments. But the success of Vanguard's Isa shows that many will opt for a limited selection in return for low and clear charges. "Most pensions cost more and [have] complicated fee models," Holly Mackay, founder of Boring Money, told the Financial Times. "This one is cheap and simple... unusual... in financial services."

If you haven't used up your 2018-2019 Isa allowance (£20,000) yet, and had planned on making some investments in the near future, you should doso with a stocks and shares Isa before the end of the tax year. As with a cash Isa, this is an account thatacts as a wrapper around your investments, allowing them to grow free of tax on capital growth or income.

Note that if you have money in another Isa, such as a cash or innovative finance Isa, this will come out of your total £20,000 allowance. So if you have £5,000 in a cash Isa, you can only put £15,000 into your stocks and shares Isa.

Although an investment Isa is generally referred to as a stocks and shares Isa, that label is somewhat misleading. In addition to shares listed on major stock exchanges around the world, you can hold investment trusts; unit trusts and open-ended investment companies (Oeics); exchange-traded funds (ETFs); and corporate and government bonds in your Isa.

The fees to consider

You will also be charged for buying and selling investments, so make sure you take those charges into account, too. However, as we've learned in recent surveys asking about the factors that are most important to MoneyWeek readers when they are picking an investment platform, cheap fees on their own aren't enough. Reliable and accessible customer service is also important, as is the availability of awide range of investments. See below forsome recommendations of brokers suitable forvarying circumstances.

Keep in mind that if you want to transfer money from a cash Isa to a stocks and shares Isa you can do so without affecting your annual allowance, but make sure you do it through the formal transfer process (see page 32). You can't just transfer investments held outside an Isa wrapper into a stocks and shares Isa. To do this, you'll have to sell your investments, and then buy them back within the wrapper.

Some brokers will reduce trading fees if you transfer an investment into a regular dealing account on their platform, then sell it to buy back via an Isa. In this situation you need to take into account capital-gains tax. If you are set to breach your allowance (£11,700 for this year, £12,000 for 2019-2020), consider splitting the sales over two tax years, or transferring an investment to a spouse that hasn'tyet used up their own CGT allowance, sothat they can sell it and then buyit back within an Isa.

Which broker to choose

If you're investing a small amount

Charles Stanley

Close Brothers

Cavendish Online

If you're investing larger amounts

iWeb

If you're looking for good investment range and customer service

Interactive Investor

AJ Bell Youinvest

Hargreaves Lansdown's VantageIsa

Note that passive investment giant Vanguard also now runs its own platform Vanguard Investor which allows you tohold Vanguard funds very cheaply. Clearlythis is only appropriate if you are looking to hold their funds. As you might expect, given the company's reputation for being such a low-cost provider, the platform charges at Vanguard are low: there is an annual fee of 0.15% on investments up to £250,000, which is less than half the industry average, as the finance blog Money to the Masses points out. Above £250,000, there is no fee. This means there is a maximum platform fee of £375.

Interestingly, however, it may ultimately be cheaper to buy Vanguard funds through Interactive Investor (or "ii"), says Money to the Masses: ii is the largest platform to operate a fixed-fee model, and charges £22.50 every quarter, or £90 a year, regardless of your portfolio size. Because the underlying fund charge for investing in Vanguard funds is identical onboth platforms, this means that if you invest more than £60,000 in Vanguard funds, then you would be better off doing this via ii.

More and more investors are using exchange-traded funds (ETFs) to get low-cost access to various themes and markets. However, I suspect many more would like to use them but are confused by the wide range of choice out there.

It's one thing to track the FTSE 100 or the S&P 500, but once we head away from well-known benchmarks like these, most of us don't really understand the pros and cons of specific indices. So every month or so I plan to outline a shortlist of solid ETFs to choose from, all focused on one particular asset class or theme. I'll concentrate on the biggest, most liquid, and best-value ETFs in each case.

Practically risk-free options

This is where bond funds investing in highly rated, mostly sovereign, investment-grade bonds usually with a short maturity profile come in. By keeping the maturity of the bonds to a few years maximum, you can minimise interest-rate risk (longer maturity corporate bonds might pay out a juicier yield, but total returns are much more vulnerable if rates rise sharply). There is lots of competition in ETFs in this sector.

For instance, Invesco recently announced it is launching the lowest-cost US Treasury Bond ETFs in Europe. Investors can choose to focus on US government bonds with maturities of between one and threeyears; three and seven years; or seven and ten years. Alternatively, they can get broad exposure across the full maturity spectrum.

The four funds will be available to trade in US dollars or pounds on the London Stock Exchange and charge just 0.06% a year. A sterling-hedged version of the Invesco US Treasury Bond 7-10 Year ETF (LSE: TRXS), which would help to protect against exchange-rate fluctuations, is also available at an ongoing charge of 0.1% a year.

US government bonds may well represent great value, with bountiful yields compared with other developed-world government debt. The yieldon the benchmark ten-yearUS Treasury bond index has more than doubled from its lows in mid-2016.

Yet I suspect this yield probably won't head much higher from here, and that in fact after a year ortwo yields might start to fall again as US growth slows and the US central bank (the Federal Reserve) starts to cut rates again.The big challenge fora sterling investor is the exchange rate, which is why the hedged, longer-dated ETF offered by Invesco might be worth investigating.

More established ETFs

total expense ratios (TER)

The first ETF, the German bond fund, is a slightly left-field candidate, but if there is a financial panic, I'd expect European bond investors to opt for the safest haven close by which will be German government bonds (or bunds).

Next comes an ETF from Vanguard, which tracks a broad selection of UK gilts and has an average yield to maturity of just 1.5%, but a total cost of ownership of just 0.12%. Gilts are a relatively safe way to stash away some cash earmarked for investing. However, longer-maturity gilts might be vulnerable in a sterling sell off, so it's worth noting that the Vanguard fund holds more than 50% of its portfolio in gilts with a maturity of more than ten years.

Index-linked gilts focus on inflation protection. This is where the third ETF on the list an iShares fund comes in. It is one of the biggest,most liquid funds in thissector, although the yield isnext to nothing.

The fourth ETF is the iShares Ultra Short Term ETF, which is very low cost and sterling denominated. I really like this fund because it is diversified between corporate and government issuers,but more than 85% of its holdings are in bonds due to mature inside two years.The average yield to maturityis 1.42%.

For those worried about the possibility of Jeremy Corbyn being elected which could prompt massive selling of gilts my alternative favourite, and the last fund on the list, is PIMCO's US Dollar Short Maturity fund, which has a higher TER of 0.35%.It's an actively managed ETF that invests primarily inshort-duration, dollar-denominated bonds across countries and issuers (government and corporate).This is a big beast of a fund, with nearly $2.4 bn under management. Around 69% of that is invested in investment-grade corporate bonds, and all but 6% is in bonds with a maturity of less than a year. The estimated yield to maturity is 3.35%, but remember that you are vulnerable to fluctuations in the sterling-dollar exchange rate.

Take advantage of the low-cost exchange-traded funds disrupting the market.

For most MoneyWeek readers, the emergence last month of a new issuer of exchange-traded funds (ETFs) in Europe wasn't a big event. The European market is already intensely competitive, with big-name brands such as BlackRock, iShares and Vanguard slugging it out with big asset managers and smaller, innovative players.

So the news that UK giant Legal & General Investment Management (LGIM) has finally entered the mainstream market with a range of "core" main-market index trackers didn't make front-page news.

LGIM's new range prompted comment because its index trackers operate a negative screen: they exclude certain types of stocks. This means the index the fund is tracking excludes stocks on a "future world protection" list. The fund won't include some notorious arms manufacturers, coal businesses and outfits that contravene the UN Global Compact (a non-binding agreement to encourage firms to adopt sustainable and socially responsible practices).

Costs dropping like a stone

But what I found more interesting was the pricing of LGIM's offering. The six new ETFs are all priced at between 0.05% (for the UK and Europe excluding UK) and 0.1% (for the rest of the world, including an Asia Pacific tracker and a US tracker). They compare favourably with products from iShares and Vanguard. One of the latter's biggest tracker funds is based on the FTSE 100 index and costs just 0.06%.

In fact, the cost of ETFs is dropping like a stone. Over in the US, big issuers such as Fidelity have been shouting about their zero-fee ETFs, while in Europe the battle seems to be about getting the pricing of mainstream trackers below 0.1%. All of this raises a tempting prospect. Investors should now be able to put together a portfolio of main-market index trackers, including ones that invest in the US, the UK, Europe, Japan and Asia Pacific (ex-Japan), for an average price of less than 0.1%.

At this price, robo-advisers and digital wealth managers face an awkward question: why invest in their products (for charges of around 0.50%) if you can do it yourself for under 0.1%? You should also be able to stuff this portfolio full of ETFs by different issuers, so you won't be entirely dependent on iShares or Vanguard. LGIM's intervention raises the stakes in this price war and throws in a simple exclusion screen for next to nothing.

The other key issue raised by the LGIM launch is that, in future, you'll need to look much more closely at the index your fund is tracking. LGIM is using a fairly unusual index series that tracks the main asset classes but doesn't use a well-known index provider such as MSCI, FTSE or S&P Dow Jones. So, for instance, with the UK version of the range you're not tracking the FTSE 100 or FTSE All-Share. Instead, it's an index that looks and feels like the FTSE, but which is managed by a small index provider called Solactive.

Why pay for the index brand?

LGIM has done this because mainstream index developers charge a substantial amount of money to license their brands. These global index firms are highly profitable, boasting sky-high operating margins. If you're only charging a handful of basis points for running an ETF, why hand over some or most of those basis points to a big brand?

In effect, our money is increasingly being used to pay for big brand names to maintain their oligopoly. This model is ripe for disruption, and the answer might be self-indexing (where the issuer runs their own index) or bringing in smaller index firms who work with the issuer (the LGIM model). As these alternative models proliferate, investors should expect the fees charged on big, main-market ETFs to start to tumble below 0.05%.

Activist watch

Nestl is facing the accusation that its corporate governance set-up is hampering growth, says Leila Abboud in the Financial Times. Corporate governance practice in the UK and US "typically frowns upon" chief executives becoming board chairmen and overseeing their successors, which has been the situation at Nestl for decades. Activist investor Third Point, which owns 1.25% of the group, has now suggested that chairman Paul Bulcke, Nestle's chief executive from 2008 to 2016, "seems too comfortable with the status quo", which risks "holding up the pace and magnitude of change".

Short positions... passive investing has gone too far

Index-fund assets invested in stocks now total some $4.6trn, while total index-fund assets have surpassed $6trn (these are funds that merely track the market rather than trying to beat it). But what happens when the index fund becomes too successful for its own good, asks Jack Bogle, creator of the first index fund and founder of passive-investing giant Vanguard, in The Wall Street Journal. If historical trends continue, a handful of giant institutional investors will one day hold voting control of every large US corporation.

Public policy cannot ignore this growing dominance, and must consider its impact on the financial markets, corporate governance, and regulation, says Bogle. "I do not believe that such concentration is in the national interest." Tentative solutions to the problem, he reckons, include more competition from new entrants to the index field, and forcing giant index funds to spin off their assets into separately managed entities.

If you're a fan of star fund manager Terry Smith's no-nonsense investment style, then arguably a possible opportunity has opened up in his Fundsmith Emerging Equities Trust, says Gavin Lumsden on Investment Trust Insider. On Monday the shares were trading at 3% below their net asset value, which is "unusual" for a £308m trust that has traded at a premium for much of the past four years.

The discount has emerged after the trust's share price failed to keep pace with a sharp recovery in the portfolio following the market downturn in October. Smith has clearly not delivered in emerging markets in the way he has in developed markets with his flagship fund, says Lumsden. "I would urge anyone thinking of piling in to consider its underperformance of the past three years" first.

Exchange-traded funds (ETF) are investment funds that are bought and sold on a stock exchange in the same way you trade normal shares. Unlike investment trusts, which are also traded on exchanges, ETFs are mostly passive investments usually structured to mirror a particular segment of the market, often indices, with the aim to track the performance of that market, rather than to try to beat it as an active fund does. 

ETFs are available on a wide range of indices, sectors, investment themes and commodities. They are often used by investors to diversify their portfolio to gain exposure to various geographies and sectors. There are dividend-paying ETFs, gold ETFs and a pet care ETF. You may also be interested in our article looking at three exchange-traded funds that investors could benefit from investing in.

Because of their huge and rapidly growing popularity, index providers are constantly launching new indices for them to track. 

How much do ETFs cost?

Given their largely passive structure, ETFs tend to have lower fees than most traditional active funds, and rampant competition is driving the price ever lower.

For example, the Invesco FTSE All-World ETF started trading on the London Stock Exchange (LSE) in July 2023 with an ongoing charge of just 0.15% - undercutting the 0.22% charged by the hugely-popular Vanguard FTSE All-World ETF.

Types of ETF

ETFs come in two types: "physical" and "synthetic". A physical ETF invests in the same assets that it's supposed to track. For example, a FTSE 100 ETF will invest in FTSE 100 stocks in proportion to their weighting in the index itself. A synthetic ETF instead agrees a "swap" with a third party - typically an investment bank which agrees to pay the ETF a return based on the performance of the index.

Many investors prefer physical ETFs because they view them as less vulnerable to unexpected risks, such as the possibility that the counterparty to the swap won't pay out. However, synthetic ETFs based in the UK and Europe must hold collateral to back these swaps, which means the risks should be limited.

Physical ETFs are arguably simpler and more transparent, but there are situations in which synthetic ETFs may be superior. For example, when investing in certain emerging markets, some of which restrict foreign investment and share ownership, a swap-based structure may be more cost-effective than investing directly in the underlying shares.

Looking to add ETFs to your portfolio? See MoneyWeek’s ETF portfolio that's designed to give investors a simple way to navigate uncertain markets. 

Most investors are too busy with day-to-day life to care too much about the minutiae of investing. So while we may operate a satellite portfolio of exciting punts, we tend to leave most of our money in core portfolios that chug along with a check-up every six months.

The fund-management industry has built up a huge architecture of funds that cater to this philosophy, but I've long thought that the easiest product of all would be a one-shot exchange-traded fund (ETF) that has a mix of asset classes and investments in one simple, cheap, easy-to-trade vehicle.

You'd pay an ongoing charge of about 20 to 40 basis points, a dealing cost of, say, £10 a time to your broker, and you could get on with the rest of your life knowing that you've sorted out the foundation of your portfolio cheaply and simply.

It's easy to see the potential for this. In the UK, Vanguard runs five multi-asset passive Life Strategy funds, which it launched in 2011. These aren't ETFs, but they are easy to buy through major brokers in the same way. They are all invested in Vanguard's range of global stock and bond tracker funds, and their asset allocations range from defensive (20% equities and 80% bonds) through to 100% equities.

Their basic charge is around 0.22%, which is incredibly low for a diversified portfolio. In total these funds have amassed over £6.8bn in the space of just a few years, which is an impressive number. The biggest fund is the 60/40 equity/bond split, which has amassed £2.6bn.

My guess is that these ultra-cheap funds will continue to gain market share and could be sitting on more than £20bn within a few years, partly because many investors who keep their money with some form of independent financial adviser will realise that their adviser is outsourcing their investment decisions to a discretionary fund manager (DFM).

Typically, these DFMs operate multi-asset portfolios at higher cost because they are supposedly adding "alpha" (superior) returns but most don't add any value on top of that basic division of a multi-asset portfolio into lower-risk and higher-risk assets. The same is also true for most absolute-returns funds, which are just an excuse to charge extra in fees for supposed multi-asset-class expertise.

The future of easy investment

However, the Vanguard range, admirable though it is, has its limits. Investors should be able to go beyond the traditional way of thinking (splitting a portfolio between defensive and growth assets) and look to other strategies to generate wealth and preserve capital but do so at low cost via tracker funds.

In the US, some services are starting to do this. A small ETF firm called Pacer has launched index-tracking ETFs, which stay invested in a broad basket of large-cap US equities while markets are in buoyant mood, but switch into defensive bonds as markets look shaky all for a total expense ratio of 0.60%.

Or take the Motif investing service, a kind of robo-adviser-meets-personal-ETF issuer. Motif lets clients pick their own theme cryptocurrencies, battery stocks, distressed retailers, or whatever you like and builds a portfolio around that. Its new Impact Portfolio services adds a sustainable investing layer to this the user chooses ethical issues that matter to them, and Motif omits companies that don't meet those values from the portfolios. Ideas like these will help investors cut costs, improve diversification and give us back time to spend on the important stuff in life.

Activist watch

Brexit is good news for foreign investors in UK stocks because the uncertainty is depressing the valuations of well-run British companies, Christer Gardell, the co-founder of Cevian Capital, tells the Financial Times. Cevian, a Swedish firm that is Europe's largest activist investor, recently sold its 8% stake in truckmaker Volvo to China's Geely for €3.25bn a profit of €2bn on its investment.

The firm plans to invest the proceeds in other firms in northern Europe. Its existing holdings include British insurer RSA, as well as steelmaker ThyssenKrupp and engineer ABB. "We really like the UK market. We like the corporate governance, the rational behaviour of corporate boards," says Gardell.

Short positions brokers suspend 1,500 funds

n UK stockbrokers have been forced to stop their clients investing in many investment trusts and exchange-traded funds (ETFs) because the funds have not met new EU requirements that came into force at the start of this year, says Simon Jessop on Reuters. The Packaged Retail and Insurance-based Investment Products (PRIIPs) legislation requires each fund to have a Key Information Document (KID) that sets out risks and costs in a standardised format.

However, around 1,200 ETFs and 300 investment trusts have failed to provide KIDs in time, according to Hargreaves Lansdown. About 900 of the ETFs and 200 of the trusts are US-based and are unlikely ever to do so, while most of the rest will probably do so in time.

n Mark Mobius, who is perhaps the best-known emerging-markets fund manager, will retire from Franklin Templeton this month. In a career of more than 30 years, Mobius built a strong track record, outperforming his peer group by 566% in sterling terms since 2000, says Rob Langston on Trustnet. But he has largely stepped back from portfolio management in the last two years. His largest remaining responsibility, the Templeton Emerging Markets Investment Trust, suffered a spell of weak performance in the three years before Carlos Hardenberg took over as lead manager in 2015. (See page 32 for a profile of Mobius.)

There's no sense in handing 1%-2% plus fees to fund managers when a cheap tracker gets results, says Stephen Connolly.

Nearly a decade ago, Warren Buffett, one of the world's most successful investors, made a $500,000 bet with a hedge-fund manager a bet that now looks certain to pay off. Buffett wagered that, over ten years, a cheap, no-frills S&P 500 index tracker (ie, one that aims to match the performance of the main US equity index see page ten) would beat the average performance of five funds of hedge funds (so in effect, 100 or so underlying funds) picked by asset manager Protg Partners. With less than a year to go, the market has trounced the fund managers a valuable reminder that, over the long run, most professional money managers charge healthy fees for rotten results.

At first glance, the bet doesn't seem to make sense. Hedge funds boast of their ability to beat the market. Managers are marketed as investment geniuses, masterfully exploiting markets for clients. If they cannot beat a simple index tracker, then how on earth do they manage to attract huge sums of money and earn such high fees from sophisticated, well-advised investors such as the super-wealthy and large investment funds?

Perhaps investors really do believe that higher fees equate to better results. Perhaps there is an attraction to playing alongside fellow sophisticated investors in funds that are not accessible to all. Perhaps sophisticated investors do look down their noses at no-frills trackers that are available to anyone. But whatever the reason, it must be rooted in investors' psychology, because judging by the bottom line, real-money-in-your-pocket results, it's the cheap, no-frills investors who typically have the last laugh.

A sure thing

Buffett and Protg's ten-year bet has just one year to go, as Buffett pointed out in the investment letter that accompanies the latest results from his investment vehicle Berkshire Hathaway. So far the index fund he chose a Vanguard S&P 500 tracker has delivered an annualised return of 7.1% a year, while the hedge funds chipped in just 2.2% (all figures are after fees). That 7.1% market return is nothing special it sits pretty much plum in the middle of the 6%-8% a year range, typical of developed-market equities over the long run. This makes the relatively weak performance of the hedge-fund managers even less impressive.

Even the best performer of the five funds of hedge funds failed to beat the market, returning 62.8% in total over the period, compared with 85.4% for the index fund. What's more, they're paid well for this failure. According to Buffett, the managers are charging upwards of 3% a year and that's before adding "performance" fees on top. The tracker, meanwhile, charges an all-in fee of just 0.05%. In other words, even if the hedge funds were keeping up, they would need to generate 2.95% a year more than the market, just to get the same result as the tracker fund, after fees. Achieving that on a consistent long-term basis is extremely difficult for any active manager not just for hedge funds.

For example, last year index provider S&P Dow Jones Indices found that almost every active equity fund in Europe investing in global, US and emerging markets underperformed its benchmark over ten years. Funds sold in the UK turned in mixed performances over shorter periods, but again all UK fund categories lagged over ten years. In short, most managers can't beat the market in the long run. They might have a good year or even a few, but eventually most melt. In turn, that means the average investor using actively managed funds for long- or even medium-term investing is likely to underperform and pay handsomely for it.

Many of these funds are also used by private banks and wealth managers or family offices in their client discretionary portfolios. Given the poor performance of most such funds, why don't the wealth managers just use trackers, cutting their clients' costs? One reason is that discretionary managers are conflicted they fear that clients will object to paying big fees simply to have their manager add to a tracker each year. They are more comfortable selling the idea that they can find the best active managers for clients. Yet in reality, most private banks and wealth managers are just adding another performance-limiting layer of costs, on top of the fees charged by the underlying active funds. Even those discretionary managers who do use trackers are often ludicrously overpriced.

An expensive ticket to Wimbledon

It's not for nothing that bankers call discretionary management their "annuity business" charm and schmooze to keep clients sweet and the money keeps rolling in. And if investors are happy to pay high long-term costs in return for a chaperoned trip to Wimbledon, the Chelsea flower show or a dreary investment conference once a year, that's fine. But while those high fees might pay for the odd day out, they're unlikely to deliver market-beating returns.

You'd be far better off paying just 0.2%-0.3% a year to invest in a tracker fund. Even a saving of 1.5% a year soon adds up. Say you have 25 years to go until you retire: on a £1m portfolio, assuming growth of 7% a year, that's just under £950,000 saved on what would end up being £5m-plus of investments. If that cash was sitting on the table, you wouldn't let someone take it away bit by bit, for no return every year. Of course, there are some rare active managers with enviable long-term records. But as a private investor, you can easily add these to a core portfolio built around trackers, and still keep your costs down and your ultimate wealth up.

Investing alongside Buffett himself by buying Berkshire Hathaway would cost less than a standard private-bank discretionary offering. So too would investing with Lord Rothschild (via the RIT Capital Partners investment trust); the Cayzer family's investment team (Caledonia Investments); Terry Smith (Fundsmith); Neil Woodford (Patient Capital Trust and others); and Nick Train (Lindsell Train or Finsbury Growth & Income). All of these strong long-term performers charge 1% a year or even less.

With that calibre of expertise readily available to bolt on to a core portfolio of cheap trackers, why would anyone pay a nobody in a private bank or wealth manager's "investment management team" upwards of 1%-2% a year of their wealth (on top of the fees paid for the underlying funds) for lacklustre long-term performance? Buffett one of the greatest stockmarket investors of our times, with an exceptionally consistent track record over 50 years certainly doesn't think you should. By putting his money where his mouth is and betting on a cheap tracker versus expensive hedge funds, Buffett has once again tried to hammer home his point. If you don't already do so, you should take his advice.

Stephen Connolly is managing director of consultancy Plain Money. He has worked in banking and asset management for over 25 years.