Despite claims that the Total Expense Ratio (TER)1 is the best predictor of returns from passive index funds, it often only does half a job when pinpointing the real costs of a tracker.

Just as nature selects for big brains, sharp teeth, and the ability to waggle your dangly bits in an amusing fashion, smart passive investors look for low tracking error as a highly desirable trait when choosing the fittest index funds in the investment jungle.

But reliable tracking error data is devilishly hard to find. And summoning the will to trawl the internet can be harder still for investors of the couch potato kind.

Tracking error - when an index tracker doesn't do its job properly

Help is at hand

Never fear, the alarm has been sounded. Monevator’s sleeper agents have once again been activated and prodded into action to fill the yawning gaps on the ‘to do’ lists of Britain’s passive investors.

Our plan this time is to host a regular performance review of the main FTSE All Share trackers versus their index.

Hopefully this survey will:

  • Expose shoddy tracker construction – we want to find out which funds are more costly than they look.

Tracking error comparison table

The following table shows the returns from a variety of All Share index tracker funds, plus the index itself, marked in blue.

I’ve ranked the entries by order of their 3-year returns. Funds placed higher than the All Share index returned slightly more than it over three years. Funds placed below it lagged the returns from the index over that period.

Fund name 1 yr 3 yr 5 yr 10 yr OCF
DFA UK Core Equity 17.7% 10.9% 5.5% 0.36%
Edinburgh UK Tracker Trust 17.2% 10.8% 5.8% 9.5% 0.30%
FTSE All Share index 15.9% 10.7% 5.8% 10.3%
Vanguard FTSE UK Equity Index 15.2% 10.4% 0.15%2
Royal London FTSE 350 Tracker 14.8% 9.8% 5.3% 0.12%3
HSBC FTSE All Share Index Ret 15.3% 9.8% 5.0% 0.28%
F&C FTSE All Share Tracker 1 15.2% 9.7% 5.1% 0.43%
M&G Index Tracker A 15.4% 9.6% 5.0% 9.7% 0.46%
Virgin UK Index Tracking 14.5% 9.6% 4.9% 9.4% 1.00%
Henderson UK Index A 15.0% 9.5% 4.9% 9.4% 0.70%
Fidelity Moneybuilder UK Index 14.9% 9.5% 4.8% 9.5% 0.30%
L&G UK Index Ret 14.9% 9.3% 4.9% 9.5% 0.56%
db X-trackers FTSE All Share ETF 11.7% 9.0% 4.7% 0.40%

Note: Annualised performance figures

The tracking error calculation is simple. Just subtract the fund’s performance figure from the return of the index. (Some call this tracking difference).

For example, the tracking error figure for the M&G Index Tracker A fund over one year is:

Tracking error = (15.9-15.4) = 0.5%

The science bit

There are a few technicalities to note if you want a fully rounded picture of what I’m doing to get my table. (This section is eminently skippable if you just want to get straight to the point).

  • The performance figures shown are annualised returns. They are brought to you by Trustnet’s excellent charting tool, which also shows discrete annual returns and cumulative returns.
  • The OCF is the explicit cost of owning the fund now. The tracking error reveals the total cost including hidden charges such as turnover, taxes, and index replication deviancy.
  • The OCF will have been higher for many funds in previous years.
  • All funds are index trackers with the exception of the Dimensional Fund Advisors’ (DFA) UK Core Equity. It is formulated according to Fama and French’s special preparation H and is designed for passive investors.
  • Most of the funds are accumulation flavour index funds with the exception of the db X-tracker ETF, and the Edinburgh investment trust tracker.
  • All funds track the FTSE All Share index with the exception of the DFA fund and Royal London FTSE 350 tracker. There is a Royal London FTSE All Share fund, but Trustnet’s charting tool refused to recognise it. The 350 fund is very similar.
  • Certain funds were excluded because they haven’t collected at least three years of data, namely: the BlackRock CIF UK Equity Tracker, new clean class funds, the SPDR FTSE UK All Share ETF, and SWIP Foundation Growth B.
  • Chart options chosen: income reinvested and offer-to-bid. If you take advantage of Trustnet’s tool, beware the quirk: every time I added a fund, the numbers for the index went loopy. Just change your radio button selection to fix it e.g. % return to £ return and back again.


The most important point this table makes is that time is a great leveller. The chart-topping DFA fund shoots the lights out over one year, but over five it’s settling back into the pack. Which is especially important to know as you have to pay expensive advisor fees to access DFA funds.

The same goes for the Edinburgh Tracker Trust that’s in a photo-finish with the index over five years but is deeply average over ten. If this fund was on my hotlist then my next step would be to find out whether its TER had been slashed, which may account for its recent rocketry, or whether there is some peculiarity in its index replication recipe.

The real dog amongst this lot is the db-X tracker ETF. Its OCF is reasonably competitive but, up, down, standing on your head, it’s way off the pace no matter what angle you look at it from.

In its worst year the ETF undershot the index by 4.2%4. Over three years it trails its benchmark by 1.7%. That’s 1.3% of hidden costs disappearing from your pocket every year. You’ll often read about how cheap ETFs and especially synthetic ETFs are, but here’s one that’s even being panned by the notorious Virgin tracker with its 1% OCF.

The Virgin tracker is nowhere near as bad as its market-lagging OCF would suggest. Fidelity has a headline grabbing 0.3% charge but has somehow conspired to underperform Virgin’s 1% fund over the last three years.

Over ten years the best-performing fund we have data for is the M&G Index Tracker. Although, in the last three years it’s fallen behind the HSBC fund which aggressively cut its price in 2009 to combat Vanguard.

Intriguingly, Vanguard is flattered by a tracking error comparison because it charges a 0.5% initial fee to cover stamp duty. That means stamp duty doesn’t swell Vanguard’s tracking error whereas the other funds excrete the share-dealing tax directly via this route.

You can account for all these nuances by squaring up your favourite funds against each other using a fund cost comparison calculator. Use your tracking error figures as the annual charge to find out the real cost of the fund.

Perfect is the enemy of good

Over 10 years I wouldn’t worry about the differences between the funds in the table we have data for. The gap between top and bottom is a piffling 0.3%.

But I’d want to avoid the gulf that’s opened up between the db X-tracker ETF and the top funds over five years. I’d worry that a fund that can miss its benchmark by over 4% isn’t doing its job properly.

The db X-tracker is the outlier though. Avoiding a straggly bottom shouldn’t find its mirror in an obsession to own the top. Don’t waste time hunting down the very best fund and then lash yourself with the cat if it doesn’t ‘win’ one year.

Look for a fund that habitually hugs its index tight, has a low OCF, and check that its tracking error is reasonably low and consistent with its peer group over as many years as possible. That should do you nicely.

Take it steady,

The Accumulator

  1. Or OCF to use the contemporary term
  2. + 0.5% initial charge
  3. + 0.5% initial charge
  4. You can see this by checking the discrete annual performance data for the fund versus the index on the Trustnet chart

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