Similarly no one asked for performance comparisons with rival funds but there was a great deal of interest in the volatility and correlation characteristics of the underlying indexes. The assumption that the fund would closely mirror the index was implicit. They simply view tracker funds as a commodity to populate an investment strategy that can be traded for minimal cost in differing market conditions. As such they view the total cost of ownership to be all important.
Thinking back to iShares, this helps to explain why not all its funds have had charges reduced in reaction to competition. For example, its S&P 500 income fund has a TER of 40bps, yet has produced a return within 0.06 per cent a year of the underlying index since launch.
For the majority of its target market (institutional investors), this fund produces exactly what is required. For the remaining minority, (retail clients and their advisers) the view is partially obscured by the fact that the fund looks quite expensive relative to alternative funds. It is inconvenient to have to say to a client that you are recommending a fund that is more expensive than some other choices but that it may well produce better net performance. This is both confusing and counterintuitive for the poor retail client and his adviser.
To address this point, the iShares S&P 500 Accumulation Fund has recently cut costs to 15bps. This fund is designed to appeal to the longer-term retail investor who will be rewarded in cost for a buy-and-hold strategy. However the income fund is likely to remain more liquid than the accumulation fund and so will still remain popular with institutional and active investors.
The chart shows two FTSE 100 Trackers: an ETF from Vanguard costing 10bps and a tracker fund from HSBC costing 17bps. From a performance point of view, which fund would be most suitable? Unsurprisingly the chart suggests the Vanguard fund is the top performer.
However this chart is on a bid-to-bid basis, taking no account of trading spreads from the ETF. The same chart on an offer-to-bid basis shows HSBC as top performer.
Looking at this simplistically, one might opt to favour the HSBC fund over the Vanguard ETF for shorter-term holdings where dealing costs would be a more significant factor and vice versa. In practice there are many factors that could determine which would be the most suitable fund for any circumstance. Deal size, duration of holding and platform/product additional service fees and dealing costs are perhaps the most significant but not the only factors to consider from the point of view of price. There are numerous good, established tracking funds now available and a myriad of potential circumstances where each may prove to be most suitable.
