Using an index fund to track the performance of theFTSE 100 has become an extremely popular way of investing over the past few years. This method of investing has even been advocated by the Oracle of Omaha, Warren Buffett, as its often the case that active asset managers fail to provide value for money.
Indeed, the majority of active mangersactually consistently underperform the market year after year. So using a low risk, low cost tracker fund way is often the best way to go.
However, while a tracker fund does provide a convenient way of tracking the market, the returns from this kind of strategy have been less than impressive over the past ten years.
I have advocated using a tracker fund strategy myself several times in the past. And for the inexperienced investor, I still believe that it is the best way to invest. Nevertheless, for the average investor, with some experience, an active strategy may be more suitable as, including fees, over the past ten years the returns from a tracking strategy have been less than impressive.
For example, theHSBC FTSE 100 Index Fund Accumulationhas achieved a total return of 6.6% per annum excluding fees over the past decade. The fund charges 0.2% per annum in fess. Similarly, theiShares FTSE 100 UCITS ETFhas achieved a total return of7% per annum over the past decade but fees will have taken 0.4% off this figure. Finally, theLiontrust FTSE 100 Trackerhas achieved a total returnof6.6% per annum excluding fees over the past decade. The fund charges 0.5% per annum in fess.
But on top of annual fund management charges, platform charges also take a chunk out of returns. Specifically, Hargreaves Lansdown charges 0.45%per annum in management fees for funds, while TD Direct and Charles Stanley bothcharge 0.3% per year.
So, after taking into account fees of around 1% per year, the average annual total return from a tracker fund over the past decade has been around 6% per annum.
After a quick look around, its easy to see that there are better opportunities out there.
Financial data company, Morningstar provides some interesting figures regarding the total return of individual companies over the past decade. The total return figure includes reinvested dividends.
At the top of the list isUnilever.Over the past ten years Unilevers has produced a total return of12.9% per annum, more than double the return achieved from a standard tracker fund including fees. Further,National Gridhas achieved an average ten-year annual total return of 11.5%, once again nearly double the return of a FTSE 100 tracker over the same period.
Royal Dutch Shellhas only achieved a lowly total return of 6.6%, although this return is still better than that of a standard FTSE 100 tracker after including fees.
Now, you may be thinking that I’ve just cherry picked Unilever, National Grid and Shell as examples because their returns are better than average, but that’s not the case. Indeed. Unilever has actually been picked by the Motley Fool’s top analystsas one of the top five shares you should hold in your investment portfolio, due to the company’s defensive nature and hefty dividend payout.
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