August 28, 2009 6:39 pm

New ETFs cut cost of index tracking

Investors seeking a cost- effective route back into equity markets now have more choice, as competition between index tracker funds is intensifying. This week, HSBC listed its first European exchange-traded fund (ETF) on the London Stock Exchange, tracking the FTSE 100 index with a total expense ratio (TER) of 0.35 per cent. Its move into ETFs follows an announcement in July that TERs on its UK index-tracker funds – which carry no upfront costs – will be cut to 0.27 per cent from September.

HSBC’s new ETF undercuts the existing FTSE 100 ETFs offered by iShares and UBS, which have annual management charges of 0.4 per cent and 0.5 per cent respectively. Lyxor and db-x trackers offer cheaper listed trackers, both with a TER of 0.3 per cent – but, unlike the HSBC ETF, these use derivatives to deliver a return, rather than replicating the shareholdings in the index.

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When HSBC’s tracker funds reduce their charges, they will match the cheapest available. Fidelity MoneyBuilder UK Index also has a TER of 0.27 per cent, while the UK trackers from F&C, Santander and Liontrust charge in excess of 0.3 per cent, according to Lipper.

Pressure to reduce charges has increased since US fund manager Vanguard entered the UK market in June. Its FTSE All-Share Index fund charges 0.15 per cent a year if bought through a fee-based independent financial adviser. Vanguard and HSBC plan to offer new ETFs soon. Tom Rampulla, managing director of Vanguard UK, said: “We hope there’s competition and fees come down.”

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