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Best Index Funds in the UK

Updated On: Jan 12, 2023
Best Index Funds UK

Contents:

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Best Index Funds in the UK

If you are looking for passive investments with significant diversification benefits and low fees, you should consider adding index funds to your portfolio. First created in the 1970s, index funds are a popular choice for seasoned and retail investors alike.

A low-cost index fund can be a great long-term investment. They are handy for those who are a little more risk-averse but still want to get involved with investing in the stock market while paying minimal fees.

What exactly is an index fund, and should you add it to your portfolio? Our guide below runs through our top ten UK index tracker funds, what index funds are, and the pros and cons of index fund investing.

When looking at the index funds below, it is essential to consider how they fit into your existing portfolio. The best index funds for you will depend on your specific circumstances.

Below, we have included several high-quality, low-cost index funds. You can buy them via most online stock brokers and fund supermarkets (we have included a few below).

Investment platforms offering these funds will allow you to buy and hold them in an individual savings account (ISA), pension or general investment account.

Here are the best index funds in the UK:



*The five-year performance of the index funds in the table above is based on a lump sum investment of £10k in December 2017. This table was created on the 30th of December, 2022. Past performance is not a reliable indicator of future results.

Best US Index Trackers

We have detailed some of the best US index trackers below. The US has the biggest stock markets in the world, making it an essential component of any diversified portfolio.

Here are some of the best US index tracker funds available in the UK:

1. UBS S&P 500 Index Fund

UBS S&P 500 Index Fund Chart
UBS S&P 500 Index Fund Chart from Morningstar

The UBS S&P 500 index fund tracks the S&P 500 index, an index of the 500 largest companies listed on the US stock exchanges, such as Apple, Microsoft, Amazon, Tesla, Google, and Johnson & Johnson.

Index funds are passive investments, and this fund is no different. The fund invests all, or substantially all, of its assets in the shares of the 500 companies that make up the S&P 500 index. The index cuts across most leading industries of the US economy, including but not limited to technology, retail, automobiles, financial services, pharmaceuticals, biotechnology and non-renewable energy.

A single investment into this fund exposes you to all 500 companies on the S&P 500 index.

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is 75%.

If you are looking for a low-cost way to invest passively in the largest companies in the United States, this fund is one of the best index funds in the UK to gain such exposure, and it has a low annual ongoing charge of 0.09%.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

2. Legal & General US Index Trust

Legal & General US Index Trust Chart
Legal & General US Index Trust Chart from Morningstar

Similar to the above fund, the L&G US Index Trust is a low-cost index fund that focuses on a range of large and medium-sized businesses in the US, but it holds a slightly wider range of companies than a straight S&P 500 tracker.

The fund tracks the FTSE USA Index, which currently lists about 605 companies across all major leading sectors of the US economy, including technology, healthcare, consumer discretionary, industrials, financial services, consumer staples, energy, utilities, and real estate. The fund’s objective is to provide passive growth to investors by tracking the performance of the FTSE USA Index. The fund currently tracks about 604 US companies, one less than the index.

The top holdings in the fund include Apple, Microsoft, Amazon, Google (Alphabet A), Google (Alphabet C), UnitedHealth Group, Tesla, Johnson & Johnson, Exxon Mobil, and Berkshire Hathaway. So, it is quite similar to the UBS S&P 500 index with two exceptions: it is cheaper and holds a slightly wider range of companies. It is also somewhat riskier than its S&P 500 counterpart in that the highs and lows are more significant. For instance, the fund fell by 10% in 2022 but was up over 25% in 2021. 

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is 75%.

If you want to invest in the US but would like a little more allocation to large and medium-sized companies with the potential for higher growth, this FTSE USA index tracker fund is one of the best index funds in the UK for that purpose, with a low ongoing charge of 0.05%.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

Best UK Index Trackers

We have compiled a list of some of the best UK index trackers. While not as well diversified as the US market, the UK market is still home to some of the most innovative and profitable companies in the world. The London Stock Exchange houses a mix of household names and smaller companies listed across a range of sectors.

Here are some of the best UK index tracker funds to get you started:

3. Vanguard FTSE 100 Index Unit Trust

Vanguard FTSE 100 Index Unit Trust Chart
Vanguard FTSE 100 Index Unit Trust Chart from Morningstar

The Vanguard FTSE 100 Index Unit Trust is a passive fund that tracks the performance of the FTSE 100 index, an index of the 100 largest companies listed on the London Stock Exchange.

The companies in this fund represent most leading sectors of the UK economy, including financial services, consumer staples, energy, healthcare, basic materials, industrials, consumer discretionary, utilities, telecommunications, real estate and technology.

Most people would recognise some of the companies included in the fund, such as Shell, AstraZeneca, Unilever, HSBC, BP, Diageo, British American Tobacco, Glencore, Rio Tinto, and GSK.

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is 24%.

This index fund could be an excellent choice for investors who want exposure to the biggest companies in the UK. The UK market is a particularly good choice for investing in mature, stable industries such as banking, energy and pharmaceuticals. The fund has a low ongoing charge of 0.06%.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

4. Vanguard FTSE UK All Share Index Unit Trust

Vanguard FTSE UK All Share Index Unit Trust Chart
Vanguard FTSE UK All Share Index Unit Trust Chart from Morningstar

The Vanguard FTSE UK All Share Index Unit Trust is a passive index fund that tracks the performance of the FTSE All-Share Index, an index of all eligible companies listed on the London Stock Exchange’s main market.

This fund has a broader range of holdings than the FTSE 100 tracker above, currently holding about 580 company stocks, meaning it invests in smaller companies too. One investment into this fund gives you access to what is called the “UK total market” or “domestic total market”. If you are keen on increasing your exposure to UK companies, this fund might be a good option for you.

The companies in this fund represent almost every sector of the UK economy, including financial services, consumer staples, energy, healthcare, basic materials, industrials, consumer discretionary, utilities, telecommunications, real estate and technology. As you would expect from a UK total market index fund, the largest portion of the fund (about 22% of the index) is invested in the financial services sector.

Some examples of companies in this index fund include Shell, AstraZeneca, Unilever, HSBC, BP, Diageo, Lloyds Bank, London Stock Exchange, National Grid, Barclays, Vodafone and Tesco.

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is 22%.

If you want to invest in the UK, and particularly want exposure to the whole UK market, including small, mid-sized and large companies, this low-cost index fund might be a great choice. It will provide more growth opportunities than a FTSE 100 tracker but will likely come with greater volatility. It has a low ongoing charge of 0.06%.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

Best Global Index Trackers

Global index tracker funds track the performance of companies all over the world, ranging from developed countries to emerging markets. 

When you buy an index fund that tracks a global market, you gain exposure to companies in countries other than the US and UK. Global index trackers are a great choice for people who want a highly diversified portfolio without limiting themselves to the domestic and US markets.

Here are some of the best global index trackers to get you started:

5. Vanguard FTSE Global All Cap Index Fund

Vanguard FTSE Global All Cap Index Fund Chart
Vanguard FTSE Global All Cap Index Fund Chart from Morningstar

The Vanguard FTSE Global All Cap Index Fund is a passive index fund that tracks the performance of the FTSE Global All Cap Index, an index comprised of large, mid-sized and small company shares in developed and emerging markets around the world. It is currently composed of about 7,200 holdings.

An emerging market is a country progressing towards becoming advanced, usually shown by some development in financial markets and the existence of a stock exchange and a regulatory body.

North America makes up about 63% of the companies in this index fund. Europe makes up about 15.5%, the Pacific 11%, emerging markets 10%, and other countries account for the remaining 0.5%.

The sectors in this fund include technology, consumer staples, financial services, energy, healthcare, basic materials, industrials, consumer discretionary, utilities, telecommunications, and real estate.

The top holdings in this index fund are Apple, Microsoft, Amazon, Google, Tesla, UnitedHealth, Exxon Mobil, Johnson & Johnson and NVIDIA.

For investors who want a single fund to set and forget in their portfolio, this may be an option well worth considering. It offers a vast level of diversification for a single low ongoing fee.

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is 52%.

If you do not want to pick individual, sector-specific funds, this “catch-all” fund invests across the entire world. It means massive amounts of diversification and simple ongoing management for you.

The Vanguard FTSE Global All Cap Index Fund has a low ongoing charge of 0.23%, making it an attractive investment given the level of diversification on offer.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

6. Fidelity Index World Fund P

Fidelity Index World Fund P Chart
Fidelity Index World Fund P Chart from Morningstar

The Fidelity Index World Fund is a passive index fund that tracks the performance of the MSCI World (Net Total Return) Index, a broad global equity index representing large and mid-cap equity performance across 23 developed market countries. 

The fund’s investment objective is to achieve long-term capital growth by closely matching the performance of the MSCI World Index. It is currently composed of about 1,500 holdings.

The USA makes up about 70% of the companies in this index. Europe, about 5%. The UK, 5%. Emerging markets, 0.12%. Other developed countries account for the remaining 19.88%.

If you are interested in investing in a “total developed world” index fund, an index fund that tracks companies across the developed world, this might be a good option for you. The beauty of investing in a global index tracker like this one is that you get the average return on the performance of the whole developed world.

Instead of investing in a combination of an S&P 500 index tracker, a UK All Share tracker, a Europe index tracker and other developed world trackers, this one fund gives you access to all these trackers without the unnecessary admin of managing multiple index funds and paying many different ongoing charges.

The top holdings in this index fund are Apple, Microsoft, Amazon, Google, Tesla, UnitedHealth and Exxon Mobil. The sectors represented in this fund include a combination of cyclical, sensitive and defensive sectors across the developed world.

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is 58%. The fund has a low ongoing charge of 0.12%.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

7. Fidelity Index Europe ex UK

Fidelity Index Europe ex UK Chart
Fidelity Index Europe ex UK Chart from Morningstar

The Fidelity Index Europe ex UK index fund is a passive fund that tracks the performance of the MSCI Europe ex UK Index. This index captures large and mid-cap companies across developed market countries in Europe, excluding the United Kingdom.

The top holdings in this fund are Nestle, ASML, Roche, LVMH Moet Hennessy Louis Vuitton, Novo Nordisk, Novartis, TotalEnergies, SAP and Siemens. While all these companies have headquarters in Europe, they operate globally, so anyone worried about the European economy can breathe easy knowing that the top holdings in this fund do not operate exclusively in Europe or the Eurozone.

The sectors represented in this fund include a combination of cyclical, sensitive and defensive sectors across Europe. This type of fund can be a good diversifier from US holdings, with the markets often performing well at different times.

The five-year performance of the Fidelity Index Europe ex UK index fund based on a lump sum investment of £10,000 in December 2017 is 29%. 

For added diversification while staying within developed economies, this Europe-focused index fund fits the bill. It can help reduce your overall portfolio volatility if you are currently heavily weighted towards US and UK stocks.

This index fund has a low ongoing charge of 0.10%.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

8. Vanguard Global Bond Index Fund

Vanguard Global Bond Index Fund Chart
Vanguard Global Bond Index Fund Chart from Morningstar

The Vanguard Global Bond Index Fund is a passive investment fund that tracks the performance of the Bloomberg Global Aggregate Float Adjusted and Scaled Index. It is an index of global government, government-related agencies, and corporate and securitised fixed-income investments with maturities greater than one year.

Bonds are considered to be the gold standard for safe investments, so this tracker fund is great for those looking to invest for later life. For investors looking for a defensive slant on their portfolio, bonds are a great way to keep volatility down long term. The fund includes bonds considered to be from safer governments and companies to reduce volatility.

The top holdings in this fund are Bundesrepublik Deutschland Bundesanleihe, Italy Buoni Poliennali Del Tesoro, United States Treasury Note/Bond, Spain Government Bond, French Republic Government Bond and United Kingdom Gilt.

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is -4%. This means that if you had invested a lump sum of £10,000 in this fund ten years ago from today, the 30th of December 2022, you would have, ceteris paribus, lost 4% of your investment. This is primarily because 2022 was not a good year for bonds.

If you want a simple defensive index tracker to add to your portfolio, the Vanguard Global Bond Index Fund is one of the best index funds in the UK for that purpose. The level of diversification is huge, the charges are low, and the ongoing management is simple.

This fund has an average annual charge of 0.15%.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

Best Emerging Market Index Trackers

An emerging market is a country progressing towards becoming advanced, usually shown by some development in financial markets and the existence of a stock exchange and a regulatory body.

Examples of emerging markets include countries in Latin America, Asia, the Middle East and Africa. Emerging market index trackers can be a good option for those looking to be more adventurous with their investment strategy. 

Below is our best emerging market index tracker:

9. iShares Emerging Markets Equity Index Fund (UK)

iShares Emerging Markets Equity Index Fund (UK) Chart
iShares Emerging Markets Equity Index Fund (UK) Chart from Morningstar

The iShares Emerging Markets Equity Index Fund (UK) is a passive investment fund that tracks the performance of the FTSE Emerging Index. This index measures the performance of equity securities of leading companies listed in emerging markets. The fund currently has about 1,800 holdings.

The top holdings in this fund are some names you might recognise, including Taiwan Semiconductor, Tencent, Alibaba, JD, Infosys, Vale and Reliance Industries. The top regions represented in this fund are Asia, Latin America, the Middle East and Africa, with countries such as Taiwan, China, India and Brazil. The top stock sectors represented in this fund are financial services, technology, consumer cyclical, communication services, basic materials, and industrials.

It is worth noting that this type of index fund can be much more volatile than those in developed economies, but the payoffs can also be significant.

For UK investors looking to add some higher growth holdings to their portfolio, the iShares Emerging Markets Equity Index Fund (UK) is one of the best index funds in the UK to buy now. Volatility will be a lot higher than US, UK and Europe index funds, but returns can be much greater in good years.

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is 14%. With an ongoing charge of 0.19%, this fund may be worth considering.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

Best Real Estate Index Trackers

The global real estate sector can be a great diversifier away from stock markets. It is not without risk, but in the long term, generally consistent income payments can mean lower levels of volatility when compared to the stock market. While the global real estate sector has seen a slowdown in recent months, there will always be a need for more housing. 

Below is our best real estate index tracker:

10. Legal & General Global Real Estate Dividend Index Fund

Legal & General Global Real Estate Dividend Index Fund Chart
Legal & General Global Real Estate Dividend Index Fund Chart from Morningstar

The Legal & General Global Real Estate Dividend Index Fund is a passive fund that tracks the performance of the FTSE EPRA Nareit Developed Dividend Plus Index. This index comprises shares in income-producing real estate holding and development companies and real estate investment trusts (REITs) with a one-year forecast dividend yield of at least 2% according to the index provider’s methodology.

This fund is a savvy investment for those playing the long game. The top holdings in this fund include Prologis, Public Storage, Realty Income, Simon Property Group and Welltower. The fund is a mixture of large, mid and small-cap real estate companies and investment trusts in countries such as the United States, Japan, Hong Kong, the United Kingdom and Australia.

Property investment is an excellent addition to a portfolio heavily weighted towards stocks. It provides access to consistent income and the potential for long-term capital growth, often with lower levels of volatility than traditional stock markets. If that sounds good to you, the Legal & General Global Real Estate Dividend Index Fund is one of the best index funds and is well worth a look.

The five-year performance of this index fund based on a lump sum investment of £10,000 in December 2017 is 11%.

With an ongoing charge of 0.15%, this low-cost index fund should attract anyone looking for property investment and not wanting to deal with tenants.

To buy the index fund, tap this link to discover the best online brokers for UK index funds.

What Is an Index Fund?

An index fund is a broad portfolio of stocks or bonds in publicly listed companies that track the performance of a market index. Index funds do not look to beat the performance of an index, instead, they aim to match it.

Index funds are passively managed, meaning their holdings are chosen based on what is in the index rather than a fund manager actively picking out which stocks to trade at any given time. While this means you miss out on the opportunity for significant market outperformance, it also eliminates the potential for major underperformance, with the side benefit of much lower fees.

When you invest in an index fund, your money is added to a pool of existing investments and then spread across companies listed in the market index. For example, an index fund for the FTSE 100 will have investments in all the companies listed on the FTSE 100. As the FTSE 100 performs well, so does the index fund. Similarly, if the index drops, the value of the fund will also fall.

There have been many instances of prominent individuals, including Warren Buffet, advising everyday investors to buy index funds instead of picking individual stocks and trying to time the market. Some have even gone as far as saying, “the single best choice for a lifelong holding is a total stock-market index fund.”

Here are a few quotes from seasoned investors and other members of the finance industry on why index funds might be the right investment strategy for you.

ETF vs Index Fund

An ETF is an active or passive fund that can be traded (bought and sold) throughout the day on a stock exchange, like a share, whereas an index fund is a passive fund that can only be traded at a set price at the end of the trading day.

Both index funds and ETFs give investors access to a broad and diversified investment portfolio. However, ETFs are more suitable for investors who want flexibility since they trade like shares on stock exchanges, and anyone can easily buy and sell them at any time during trading hours.

When investing in index funds and ETFs, you have the option to choose a fund of either the “Income” or “Accumulation” class.

If you choose Income, you will receive regular dividend payments into your account. These dividend payments come from the companies the fund invests in.

If you choose Accumulation, the dividends from the companies the fund invests in will be automatically reinvested into your portfolio, increasing the total value of your investments and, by extension, the price of each unit of the fund.

Most people investing to grow their money in the long term usually buy index funds of the Accumulation class.

Pros and Cons of Index Funds

The advantages of investing in index funds are low cost, broad diversification, transparency, ease of accessibility, and convenience.

The disadvantages of investing in index funds are lack of flexibility, inability to beat the market (in theory), tracking errors, lack of downside protection, and concentration risk.

Pros of Index Funds

Here are some advantages of index funds:

  1. Low Cost: The fees on index funds are quite low compared to active funds because of the “low-touch” investment strategy used by index fund managers.
  2. Broad Diversification: Since index funds hold investments from several publicly listed companies, they are well diversified and can have better long-term returns than an actively managed fund once fees are considered.
  3. Transparency: For those after maximum transparency, another positive of index funds is that you know exactly what your money is being invested into at all times.
  4. Ease of Accessibility: Index funds are relatively easy to access, and you can buy the most popular ones on any online fund supermarket in the UK.
  5. Convenience: Unlike investing in individual stocks and shares, when you invest in an index fund, you do not have to worry about constantly researching companies, timing the market or rebalancing your portfolio.

Cons of Index Funds

Here are some disadvantages of index funds:

  1. Lack of Flexibility: When you invest in index funds, you have no control over the exact components of the fund or the weightings attached to each component.
  2. Inability to Beat the Market (in theory): By definition, an index fund cannot outperform the market.
  3. Tracking Error: Tracking error is a measure of how accurately an index fund is able to track its index. Tracking errors could lead to positive or negative results, so a fund with a high negative tracking error could perform well below the index.
  4. Lack of Downside Protection: In times of high volatility, such as during the peak of the Coronavirus pandemic in 2020, there is no cap on losses.
  5. Concentration Risk: Most index funds track indices based on market capitalisation, economic sectors, location or a combination of all three. Additionally, all holdings in most index funds do not have equal weightings. For example, a UK 100 index fund that tracks the performance of the 100 largest companies on the London Stock Exchange will have about 20% of its holdings in financial services. Similarly, an S&P 500 index fund tracking the 500 largest companies listed on American exchanges will have about 25% of its holdings made up of companies in the technology sector. This kind of composition exposes your portfolio to concentration risk.

Best Apps for Index Funds

Here are some of the best apps to buy index funds in the UK:

  1. Interactive Investor - One free trade per month; 3,000+ funds
  2. Bestinvest - Low cost; 2,500+ funds
  3. AJ Bell - Mid-price range; 2,000+ funds
  4. Hargreaves Lansdown - Lots of investment options; 3,000+ funds
  5. FinecoBank - Low cost; 750+ funds
  6. Vanguard - Low cost; 70+ funds


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