What are investors buying? Inside the top 20 index funds and ETFs

On The Money

The episode explores the rising popularity of index funds and ETFs among investors, specifically analyzing the top 20 most-purchased funds f

Key takeaways

Index funds and ETFs are popular due to three main drivers: simplicity, low fees (often <0.2%), and strong historical performance.
The new Vanguard FTSE Global All Cap ETF offers a highly competitive ongoing charge of just 0.07%.
Active management fees typically range from 0.8% to 0.9%, significantly higher than passive alternatives.
Investors should look beyond the Ongoing Charges Figure (OCF) to include transaction costs and tracking error.
Thematic ETFs, such as those for gold or silver, should generally serve as satellite holdings rather than core portfolio components.

Main topics

Passive vs. Active investing
ETF fee structures
Global market exposure

Notable quotes

You buy the markets and it's quite easy to understand.

Conclusion

Investors should prioritize low-cost, transparent funds while remainin

Transcript preview

Speaker 1 (0:03) Hello and welcome to our latest episode of On The Money, the weekly show that covers investment and pension topics in a practical manner. Today the focus is on a fund type that has grown massively in popularity over the past decade and is particularly popular with younger investors and that is index funds and ETFs, exchange traded funds. Joining me to run through this topic is Dave Baxter. who is Senior Fund Content Specialist at Interact Investor. Dave, welcome back to the podcast. Speaker 2 (0:38) Thank you for having me on. Speaker 1 (0:39) So Dave, we're Speaker 2 (0:40) going Speaker 1 (0:40) to mainly focus on the most popular index funds and ETFs among our own customers. And I've produced essentially like a little league table of the top 20 since the start of the year to around mid-September. And that is based on real-time. buys which excludes regular investing. We'll show the table a couple of times so if you're watching the podcast on either YouTube or Spotify you will see it there. But before we show the table Dave could you explain why index funds and ETFs have become more popular over the past decade? Speaker 2 (1:21) So I'm going to give three reasons. One is, I suppose, kind of simplicity. There is a simple premise behind buying these funds. You buy the markets and it's quite easy to understand. The second is fees. So there's been a big price war in this space. The fees, as we'll discuss, are very low. I think that's instinctively appealing, even to someone who doesn't really know investing. And probably the biggest reason is performance. Speaker 2 (1:51) passive funds markets generally have done very well. Active funds have been pretty inconsistent in getting the better of those markets. And I think over the last decade in particular, that narrative has picked up and a lot of people have kind of subscribed to this mantra of, you know, just buy a tracker. Speaker 1 (2:10) Completely agree with all of those points, Dave. Just to slightly extend on one of your points. I also think investors like index funds and ETFs because... they broadly know they're going to get what it says on the tin, the performance of a particular index minus, in most cases, the very small fee that the index fund or the ETF charges. And on fees, if you're seeking to gain exposure to the global stock market, the UK or the US, then you typically can find index funds or ETFs that charge... less than 0.2 % a year or less than 0.15 % a year. Speaker 2 (2:50) So Speaker 1 (2:51) on a £10,000 investment, that's 20 quid or 15 quid, which I mean, that is very compelling because you're getting lots of exposure to different companies, sectors, industries, hundreds or thousands of companies in the case of a global index fund or ETF. Whereas with an actively managed fund, managed by a professional investor, firstly, you don't know at the outset whether the full manager is going to outperform. And secondly, the charge that they levy, it is higher, typically 0.8 to 0.9 % a year. And yeah, just going back to my point, I think people like the simplicity of knowing from the outset that's broadly what I'm going to get. And people like, I'll just happily take the return of a particular index. Speaker 2 (3:39) Yeah, again, I think it's that idea, isn't it, of just by the market and should in theory see things go up. I mean, people do warn that because of the composition of trackers, because they're very concentrated around a handful of names, things could go south. So it is worth bearing in mind. But in the last decade, that whole kind of appeal has been there. Speaker 1 (3:59) And I think it's important to point out that it's not an either or decision. I mean, I invest in both actively managed funds. and index funds slash ETFs, so-called passive funds in my own stocks and shares ISA. And also my pension, I mix and match between the two strategies. But when it comes to actively managed funds, I'm really trying to ensure that the fund manager is doing something vastly different than what I can get elsewhere, what I can get from an index fund or an ETF for a much lower fee. So now that we've explained the reasons behind the... popularity of both index funds and ETFs, let's look at the ones that are capturing the attention of investors. So if you're watching the podcast on YouTube or Spotify, you'll now see the top 20 table. Dave, standing out like a sore thumb is the sheer amount of global strategies in this top 20. Now, global ETFs and index funds, they can make great core holdings for investors. Could you explain why and are there any other reasons as to why you think this phone type is in particular popular? Speaker 2 (5:10) Yeah, I mean, it makes a good kind of core holding because in theory it gives you, you know, diversified exposure to the main markets. Interestingly, I suppose trackers also are effectively backing the kind of winning shares and the winning regions of a given market. So you are kind of capturing those returns and then you can add so-called kind of satellite holdings alongside that. Speaker 2 (5:38) Looking at the kind of popular names, we have got those global funds. What's interesting is a lot of the popular ones have the kind of all-world phrasing in their names. And the important distinction between, say, a FTSE World Fund and FTSE All-World Fund is All-World has a bit of exposure to emerging markets. So it's less, it's still very US heavy, but it's a bit less US dominated. and in theory it's a bit more, you know, genuinely global and diversified. Speaker 1 (6:11) And for me, Dave, that's why it's important to look beyond the ongoing charges figure for an index fund or an ETF. And on charges, that doesn't represent the full fee that you're paying because transaction costs are not included. So it's important to find out those transaction costs as well. I mean, in most cases they are small. particularly if you invest in a global index fund or