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Global index tracker or roll your own?

Low cost tracker funds are great passive roads to long term investment success. "Fund of funds" style vehicles are comparatively expensive however.

Low cost index trackers rock!

In Lars Kroijer's great series of short investment videos he suggests that a low cost global passive index tracker fund is the way to go for many smart, inexperienced, or just lazy investors.

Global Index Tracker
Low cost global passive index tracker fund is the way to go for many smart, inexperienced, or just lazy investors.
There are several options available for investors who are inclined to follow Kroijer’s advice.

Passive funds that track the MSCI World Index by holding direct investments proportionate to the composition of the index. Examples include the managed funds by Fidelity (0.15% OCF), HSBC (0.15% OCF), and Vanguard (0.15% OCF).

ETF equivalents also tracking the MSCI World Index include HSBC (0.15% OCF), Vanguard (0.18% OCF) and Blackrock (0.20% OCF).

Fund of funds, diversification for lazy people

Next there are funds who adopt a “fund of funds” approach, holding funds tracking various indexes around the world. The proportion of each fund holding is subjectively determined by the fund manager.

Fees are higher on this class of funds, as the underlying funds each charge a fee then the “fund of funds” manager levies an additional fee on top. Some of the more reasonably priced offerings in this investment class are the Vanguard Lifestyle (0.24% OCF) and Target Retirement (0.24% OCF) ranges.

The Vanguard “fund of funds” approach has the additional benefit of periodically rebalancing asset allocations from risky towards risk averse as a nominated retirement date approaches.

You certainly pay for the “fund of funds” approach however, 0.24% OCF is much higher than the passive tracker 0.15% OCF.

Being lazy will cost me how much?!?

For a £100,000 initial portfolio over a 45 year working life, the "fund of funds" approach costs £32,000 more in fees, assuming a continuation of the average 5% global average real rate of return over the last 115 years.

5% global average real rate of return over the last 115 years
I think with a little bit of effort we can beat the 0.15% OCF benchmark, by borrowing the “fund of funds” approach of cherry picking low cost index trackers to approximate the MSCI World Index composition.

Hand rolled global index tracker.
Hand rolled global index tracker.
The question is could we save enough in fees to make the hassle worth while?

Step 1: Break open one of those MSCI World Index tracker funds to see what it is made of.



From this we can see there is some variance between the fund and the index. Not unexpected, by definition any tracker fund will always be playing catch up to the index upon which it is based.

Step 2: Roll up each of the broken out geographical regions into an approximate index region large enough to have reasonable fund coverage.

Step 3: Select a low cost passive index tracker fund for each index region and compute the weighted average OCF.



With less than an hour of internet research I’ve hand rolled a reasonable approximation of a global index tracker with a 0.10% OCF.

How does that compare to the benchmark?

Over the same 45 year run up to retirement it works out £50,000 cheaper than the managed “fund of funds” approach.

So what?

It is also about £18,000 less than the store bought global index trackers, excluding the brokerage costs required for periodic manual rebalancing.

2 comments :

Jasper Lee said...

Never thought about this but glad now, keep up the good work!

Slow Dad said...

Thanks Jasper Lee.

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