A global tracker fund takes care of all your equity diversification needs in a single investment product. In this post, we’ll explain how to choose the best global tracker fund for you and we’ll list our picks from the range of choices on offer.
What is a tracker fund?
A tracker fund is an investment fund that tracks an index like the FTSE 100 or, in the case of a global tracker, an index such as the FTSE All World.
Your money is pooled along with the global tracker’s many other participants, and is used by the fund’s management team to invest in every major stock market on the planet.
This gives you a slice of ownership in thousands of world-class firms and lets you buy into the prospects of entire industries, countries, and continents at a stroke.
The index followed by a global tracker fund is essentially an international league table of the world’s leading companies from Amazon to Alibaba to Taiwanese semiconductor giant TSMC.
Global tracker funds replicate their chosen index as faithfully as possible. In other words, they trade stocks to mirror the fortunes of each firm’s rise and fall consonant with their performance, investor sentiment, and global capital’s best estimate of future earnings.
Investing this way is known as index investing or passive investing. It is the best strategy to choose if you want to maximise your chances of meeting your financial goals.
Investing giants like Warren Buffet recommend index funds. Even ex-hedge fund managers have switched sides and urge everyday investors to pick global index trackers.
Global tracker funds – what really matters?
All-World – Most products labelled world index funds only encompass developed world countries. They skip the emerging markets, including the likes of China and India.
Such ‘world index trackers’ are less representative of the global economy. Instead look for ‘All-World’ or ‘Global’ index funds that include emerging markets.
Alternatively, if you do choose a developed world solution, you can add an emerging market index fund to your portfolio to make up the difference.
Diversification – Following on from the above, compare how many stocks your shortlist of global tracker funds includes. The more the better, because your index fund will then do a better job of representing the global stock markets that it follows.
Cost – This is the most important factor that will impact your returns and that you can control. There’s often little performance differential between global index trackers so, if in doubt, pick the cheapest by Ongoing Charge Figure (OCF) / Total Expense Ratio (TER).
Reassuringly expensive price tags will not secure you a superior global equity tracker fund. Go for cheap, plain vanilla flavour trackers. Don’t worry about bells and whistles.
Don’t fret about small changes in cost, either. An OCF differential of 0.1% on £10,000 is just £10. That would cost you £50 a year on a £50,000 investment if, for example, your fund’s OCF is 0.25% instead of 0.15%.
Only you know your personal hassle threshold. Try to work out whether the impact of costs over your investing lifetime is worth switching.
Investor compensation – You’re covered for up to £85,000 if your global index tracker is based in the UK. But if it’s based in Ireland – as most ETFs are – then you’re looking at €20,000 max. Note, investor compensation schemes only kick in if your broker or fund manager goes bust and your money disappears. Stock market losses are not covered!
The index – You should Google the tracker’s index to make sure it’s truly global. If it isn’t, find out what’s missing. Check your product’s factsheet, too.
Global index fund or Global ETF?
ETFs and index funds are both types of index tracker. They’re both excellent ways of quickly diversifying your investments across the globe for an amazingly low cost.
We’re equally happy using ETFs or index funds and include both in our best global tracker fund table below.
The only time the fund type is a deal breaker is if:
Your stockbroker charges an ETF dealing fee that costs more than 1% of your typical transaction value.
The same broker allows you to trade index funds for free.
In that case, we’d invest in a global index fund in preference to the global ETF. That’s because the impact of a high dealing fee is surprisingly damaging over the long-term.
See our cheap broker comparison table for more. Percentage fee brokers often allow you to trade global index funds for nothing.
A few brokers also enable you to trade global equity ETFs for £0. Check out InvestEngine, Freetrade, and Vanguard for that option.
Best global tracker funds – compared
Tracker
Cost = OCF (%)
Index
Emerging Markets (%)
No of holdings
Domicile
HSBC FTSE All-World Index Fund C
0.13
FTSE All-World
10
3,321
UK
iShares MSCI ACWI ETF
0.2
MSCI All Country World
8
1,618
Ireland
Vanguard FTSE All-World ETF
0.22
FTSE All-World
9
3,767
Ireland
Vanguard FTSE Global All Cap Index Fund
0.23
FTSE Global All Cap Index
9
7198
UK
Source: Morningstar and fund provider’s data.
There is very little to choose between these four global equity trackers:
HSBC’s global index fund is the cheapest and so tops the table.
iShares ETF follows the MSCI index whereas the others follow a FTSE index. The indexes vary somewhat in country composition but have performed almost identically over the last decade.
Vanguard’s Global All Cap index fund has about 5% small cap exposure and greater diversification than the rest.
The reality is these shades of grey haven’t made much difference to results over the longer term. More on that in a moment.
I’ll also throw two other choices into the pot because they do something a little different:
Fidelity Allocator World Fund W – OCF 0.2%
Vanguard LifeStrategy 100 fund – OCF 0.22%
Vanguard’s LifeStrategy funds include a UK equity bias of around 20%. That compares to a 4% UK allocation for the true global index trackers in the table. You could choose LifeStrategy 100 if home bias suits your situation. Go for LifeStrategy 20-80 if you want an all-in-one fund that includes government bonds.
The Fidelity fund is actively managed. It features a REIT exposure and small cap allocation of about 10%.
Both are funds-of-funds. They manage their asset allocation by holding other index trackers instead of trading the shares of listed firms.
Here’s a useful piece on how to compare index trackers.
Best global tracker funds – results check
Source: Trustnet’s Multi-plot Charting tool
I’ve highlighted the 5-year annualised returns for the global tracker selection above because that’s the longest comparison period we have for every fund in the mix.
Note: the FTSE All World and MSCI ACWI entries show the index returns (letters C and A in the Key column).
You’d expect a good tracker to lag its index slightly because index’s don’t bear fund management costs.
HSBC’s FTSE All World index fund is the best performing fund by a decent 0.6% annualised margin over 5 years.
It’s also outstripped its index to a surprising degree for a tracker fund.
Counter-intuitively, that doesn’t make it a better global tracker than all the rest.
A tracker fund is meant to mimic its index. If their results differ too much then it suggests something else is going on.
For example, the FTSE All World index includes approximately 4,128 stocks. The Vanguard FTSE All World ETF contains 3,767 of those, while the HSBC equivalent holds 3,321.
It could be that the HSBC index fund has gained a temporary edge because recent market fluctuations have randomly favoured its particular deviation from the index.
Indeed, the last time we checked, the Vanguard ETF was a 0.1% annualised nose ahead of HSBC over five years.
All of which is to say, don’t put too much weight on short-term return results which can easily be reversed by market moves.
If you’re starting from scratch then by all means choose the HSBC FTSE All World Index fund.
But there’s no need to switch out of the other top four funds because of this result.
Index trackers are typically cookie-cutter products. The results demonstrate the top four all work just fine. They are practically interchangeable.
The fact is we’re not checking performance to crown the one, true, best global tracker fund.
With me-too products, you don’t have to over-optimise. Any candidate from a field of well-matched rivals will probably be good enough.
The performance check just ensures that nothing on our shortlist is broken or not what we think it is.
A world of difference
The performance check does allow us to see that the two funds that significantly deviate in composition trailed the pack over the last five years.
If UK shares or global REITs go on a hot streak then one of the bottom two could easily shoot up the table. But if you want a pure global market cap strategy then stick with the top four.
Here’s a few other things to note.
Fund sizes – All four index trackers in our top table have hundreds of millions in assets under management (AUM). Efficiencies of scale typically kick in above £100 million. The Vanguard FTSE All World is more than twice the size of the iShares ETF, but it hasn’t made much difference to performance over time.
Fixed income – The trackers in our table are equity funds. Owning additional high-quality government bonds is crucial to help you not to freak out during a stock market crash.
Check out our best bond fund choices to find your fixed income Venus for your equity Mars.
Understanding how to build your asset allocation will help you work out how much you need to put in safer assets.
Income versus accumulation – All of our best global index tracker picks come in both flavours, except the iShares ETF which is only available as an accumulating fund.
World and World ex-UK – I excluded these trackers, because it makes no sense to only include the Developed World or skip the UK when you’re trying to diversify across the whole world.
KISS
The beauty of the single global equity tracker strategy is its simplicity.
Yes, you could shave away a little cost by building a similar portfolio from separate regional trackers.
But is it worth the aggro in time and dealing fees?
Can you trust yourself to stick to the global market’s verdict? Or will you justify trimming back on Japan or the US or wherever because you can apparently spot a bubble that everyone else has missed?
Fill your boots if you need the control, but know that you don’t have to.
Nobody can predict which strategy will win over your investment lifetime. But putting a global tracker fund at the core of your asset allocation is a rational choice in an insane world.
Take it steady,
The Accumulator
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Why take 45 index trackers into the investing shower when one will do. (Ah, but which one?)
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