Low-cost index funds for simple investing

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 tend to outperform their active counterparts.

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Data from Morningstar released in September 2024 showed that passive funds have attracted more inflows than active funds every year since 2014.

The appeal is obvious: index funds are “the most cost-effective, efficient and transparent way to gain global diversified exposure to the world’s stock markets, regions, sectors and individual companies in one single fund”, according to Raymond Backreedy, chief investment officer at Sparrows Capital.

Index funds offer low costs (as well as low transaction fees due to low turnover), diversification, and transparency thanks to rules-based tracking of benchmarks, says Backreedy.

The popularity of index funds is plain to see. 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 is passive investing?

Passive investing means the securities held in your fund are not chosen by a portfolio manager, which can make the cost of investing drastically cheaper.

Passive or index funds buy a basket of assets that try to mirror what the stock market is doing instead of trying to beat it.

Using much more technical language, the CFA Institute, the association of investment professionals, describes it as such: “Passive investing refers to any rules-based, transparent, and investable strategy that does not involve identifying mispriced individual securities.”

If you are a passive investor, you are also in it for the long haul. Passive investors limit the amount of buying and selling within their portfolios, which is also what makes it such a cost-effective way to invest.

An obvious example of a passive approach is the purchase of an index fund that follows a major index like the FTSE 100 in the UK and the S&P 500 in the US.

The advantages of passive vs active investing

The active versus passive investing debate is age-old. On paper, being an active investor and trying to beat the market seems like the best way to invest.

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.

AJ Bell’s latest Manager versus Machine report showed that only a third of active funds have outperformed a passive alternative over the last 10 years, and slightly lower than that had outperformed in 2024 up until 30 November.

“Make no mistake, passive funds are eating the lunch of active managers, and the continued strong performance of index trackers will do nothing to staunch this trend,” wrote Laith Khalaf, head of investment analysis at AJ Bell.

^{Sources: AJ Bell, Morningstar total return in GBP to 30 November 2024. *To 30 November 2023}

Index funds, then, don’t just carry lower costs, but tend to generate superior returns to active funds.

How to look for low cost index funds

So what should you look out for when choosing the best index funds and exchange-traded funds (ETFs)? There are several factors to be aware of.

Low costs are key, of course. Every penny you pay in management fees is a penny that does not compound over time. Investors should therefore look for low cost index funds with the lowest possible total expense ratios (TERs) – the annual running costs for the fund. Some brokers, such as Hargreaves Lansdown, offer management fee discounts for investors who pick their preferred funds.

“Pricing is extremely competitive and has dropped over the last decade or so,” says Backreedy, adding that fees for large index funds tracking established indices typically start in the single digit basis point range.

However, costs aren’t the only factor to consider. For example, it is also important to consider the tracking error (the difference between the performance of the index and the fund). Since the goal of the tracker is to match the performance, significant outperformance is just as much of a reason to worry as is significant underperformance, as it suggests problems with the way the fund is run. It can also indicate how fees will hit performance in the long run.

What are the different types of index funds?

Tracker funds typically come in one of two main types: open-ended funds (OEICs), which are not traded on the stock market, or ETFs, which are.

Different types of funds are suitable for different types of investors. Many online stockbrokers have different charging structures for different funds. That means the best fund for you might depend on which is the cheapest and easiest to buy and sell. ETFs can be bought and sold when the market is open, while OEICs can take days to buy and sell as they need to create and redeem shares for investors.

Some funds can also charge large entry or exit fees; you should double check these before buying.

These fees can be a huge drag on returns in the long run, especially when other charges are added. This excludes trading commissions, which some brokers might charge when dealing funds (these fees can turn even the best-looking low cost index funds into expensive investments).

Twelve low-cost tracker index funds to consider

Here, we’ve picked out a (non-exhaustive) selection of some tracker funds for different geographies that could be worth considering.

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

^{*To 2 June 2025, via Trustnet.}

^{*To 2 June 2025, via Trustnet.}

^{*To 2 June 2025, via Trustnet.}

^{*To 2 June 2025, via Trustnet.}