Always remember that investments can go down as well as up in value, so you could get back less than you put in. A rule of thumb is to hang on to your investments for at least five years to give them the best chance of providing the returns you want.
Invest in Index Funds With II’s Free Regular Investing Service.
Capital at risk. Other fees apply.
Follow the steps below to invest in index funds in the UK:
We’ve compiled a list of the best places to buy index funds in the UK. These are the best index fund brokers, investment apps, websites and fund supermarkets for buying, selling, and holding UK index tracker funds, ETFs and other investment products.
Please remember that when you invest, your capital is at risk. ISA, pension, and tax rules also apply. The platforms listed below are authorised and regulated by the UK’s financial watchdog, the Financial Conduct Authority (FCA).
Here are the best places to buy index funds in the UK:
Interactive Investor, recently acquired by wealth management giant Abrdn, is the second-largest investment platform in the UK. It is well known for its fixed charges (as opposed to percentage-based fees like most other investment platforms) and has been providing investment services and financial information since 1995.
If you choose to invest with Interactive Investor, you will gain access to over 40,000 investment options, including UK and overseas shares, funds, investment trusts, and ETFs. This is the second-widest choice of UK and international investments offered by an investment platform in the UK. Interactive Investor allows you to build your portfolio in multiple ways depending on your investment goals, attitude to risk and personal preferences. Beginner investors or those who prefer ready-made investments can build their portfolios using Interactive Investor’s Quick-Start Funds, an easy way to start investing where you choose from six low-cost funds prepared by the team of experts at Interactive Investor. Advanced or more confident investors can choose from a wide range of funds and shares and build their portfolios themselves. Interactive Investor gives you access to 17 global stock exchanges, including exchanges in North America, Europe and Asia Pacific. These include markets such as the FTSE 100, FTSE 250, FTSE All-Share, S&P 500, NASDAQ, NYSE, Dow Jones and more. In addition to the above, Interactive Investor offers Japanese, Indian and Chinese shares in the form of American Depositary Receipts (ADRs).
Interactive Investor gives you a free trade every month, which you can use to buy or sell any investment. After that, trades usually cost £3.99. For those investing £50,000 or less, you can sign up for the cheapest plan (Investor Essentials), which costs only £4.99 a month but does not come with the monthly free trade. The platform also offers a free regular investing service that allows you to deposit as little as £25 a month towards your investments without paying a trading fee each time, irrespective of the plan you choose. Interactive Investor also has lots of expert ideas, research and insights, which can be helpful when selecting investments. Interactive Investor’s suite of products includes a Trading Account, Stocks and Shares ISA, SIPP and Junior ISA.
Capital at risk.
AJ Bell is one of the UK’s largest online investment platforms, and its mission is to make investing as easy as possible for anyone. The platform offers thousands of investment options for the DIY investor, including UK and overseas shares, funds, bonds, investment trusts, ETFs, ETCs, warrants, and ready-made investments.
There are multiple ways to get started with AJ Bell, depending on your risk tolerance and investing savviness. Beginner investors or those who prefer to choose a ready-made investment portfolio can get a little, or a lot, of help from AJ Bell’s specialists by selecting one of the investment ideas on offer. Investment ideas are diversified ready-made baskets of investments that you can select based on your personal preference and attitude to risk. There are eight total investment ideas, each built by a specialist team, and you can pick the right one for you depending on whether you are seeking to simply grow your money over time or receive an income whilst still growing your money. Expert investors can take advantage of the stock and fund screeners and complex instruments available on AJ Bell and build their portfolios themselves.
AJ Bell charges an annual platform fee ranging from 0.25% to 0%, depending on the size of your portfolio. Dealing fees for buying and selling investments online are £1.50 for funds and £9.95 for shares (reducing to £4.95 if there were 10 or more online share deals in the previous month). AJ Bell’s products include a Share Dealing Account, Stocks and Shares ISA, Junior Stocks and Shares ISA, Lifetime ISA, SIPP and Junior SIPP.
Capital at risk.
Bestinvest is a UK low-cost investment platform that allows you to trade or invest in over 3,000 instruments, including shares, funds, ETFs, and investment trusts. With Bestinvest, you can build an investment portfolio in two ways depending on your personal preferences, goals and attitude to risk.
Beginners or those who prefer a ready-made investment can build their portfolio by selecting one of Bestinvest’s ready-made investment portfolios. These off-the-shelf style portfolios are created and managed by the team at Bestinvest and come with a carefully selected and diversified collection of investments. Once you have picked one, you do not need to do anything else. There are three ranges to choose from: Expert, Smart and Direct, depending on whether you want to maximise the returns for the risk you take, focus on cost-efficiency or focus on individual investments. The team at Bestinvest will walk you through the process of selecting a ready-made portfolio. Advanced or more confident investors can choose from a wide range of funds, shares, ETFs and ITs and build their portfolios themselves.
To start building your portfolio with Bestinvest, you can deposit a lump sum or set up a monthly savings plan which allows you to automatically save or invest a set amount into your investment account every month. There are no setup fees or fund dealing charges with Bestinvest. Bestinvest charges an annual platform fee ranging from 0.40% to 0% for DIY investing and 0.20% to 0% for ready-made investing. The dealing fee for buying and selling shares online is £4.95 per deal. Bestinvest’s suite of products includes a Stocks and Shares ISA, Junior Stocks and Shares ISA, General Investment Account, SIPP and Junior SIPP.
Capital at risk.
Kickstart your investing with an award-winning ISA. Hargreaves Lansdown is a FTSE 100 company and the largest investment platform in the UK. Its core mission is to build long-term client relationships by becoming a trusted partner and financial champion, ultimately helping you increase your financial security for the future.
If you choose to invest with Hargreaves Lansdown, you will gain access to over 2,500 funds, UK and overseas shares, ETFs, ETCs, investment trusts and more. With Hargreaves Lansdown, you can build your investment portfolio in one of two ways depending on your investing savviness: Beginner investors or those who prefer to choose a ready-made investment portfolio can build their portfolios by choosing from a range of ready-made options where the team of experts at Hargreaves Lansdown will take care of the day-to-day investment decisions for you. Advanced or more confident investors can choose from a wide range of funds, shares and other investments and build their portfolios themselves.
Hargreaves Lansdown does not charge a platform fee on its Fund and Share Account but charges 0.45% (capped at £45) a year on its ISA and 0.45% (capped at £200) a year on its SIPP. It offers most products, including a Fund and Share Account, Stocks and Shares ISA, Lifetime ISA, Junior ISA, and SIPP. These services are intended for investors who are happy making their own decisions.
Capital at risk. The fees quoted here are not exhaustive. Other charges apply.
Vanguard is a low-cost investment platform with over 75 own-brand funds, including ETFs, active funds and index funds. Vanguard does not offer stocks and shares, but there are various ETFs on offer for those interested in exchange-traded securities.
The Vanguard Stocks and Shares ISA allows you to build an investment portfolio in two ways depending on your investing savviness: beginner investors or those who prefer a ready-made investment portfolio can build their portfolio by selecting one of Vanguard’s ready-made portfolios, which give you access to thousands of bonds and shares in a single investment. Advanced or more confident investors can choose from over 75 individual Vanguard funds and ETFs and build their portfolios themselves.
To open a Vanguard Stocks and Shares ISA, you need at least £100 per month or a lump sum of £500. There is a yearly management fee of 0.15% (capped at £375) per year. Some of the funds on offer have separate charges, so please check these before investing. Vanguard’s suite of products includes a Stocks and Shares ISA, Junior ISA, General Account and SIPP.
Capital at risk.
Imagine you’re at a supermarket, and instead of picking out individual items, you could just pick up a basket that already has a little bit of everything you need. In the world of investing, an index fund is kind of like that pre-packed basket.
An index fund is a type of investment that includes a little bit of many different companies’ stocks. These companies are usually part of a big list called an “index”. Think of this index as a shopping list and the companies on it as the items. A well-known index is the FTSE 100, which includes 100 of the biggest companies in the UK. So, if you invest in an index fund that tracks the FTSE 100, you are essentially buying a small piece of each of those 100 companies.
To elaborate, index funds are not only limited to the UK. For example, there’s a famous index in the US called the S&P 500. It is like the FTSE 100 but contains 500 of the largest US companies. If you put your money in an index fund that follows the S&P 500, you’re buying a tiny share of each of those 500 companies.
And here’s the fun part - index funds are not just about stocks! They can be made up of other kinds of “ingredients” or assets, too. You’ve got index funds filled with bonds, which are basically loans you give to companies or governments in exchange for interest. There are also index funds composed of real estate, where your money goes into a mix of different property-related investments. Some even have a mix of everything - a true financial smorgasbord!
So, think about it. If you pick a “basket” or index fund filled with a variety of these assets, you’re not just betting on one company or one type of investment. Instead, you’re spreading your chances across hundreds of different companies or bonds or properties. It is like getting a taste of the whole investment buffet without having to buy everything separately!
Think back to our supermarket analogy. Suppose you had to pick each item for your basket individually. You’d walk up and down every aisle, read all the labels, compare prices, and maybe even check the quality of products. That’s a lot of work and can take hours! But what if you don’t have all that time? Or what if you’re not sure what makes a good loaf of bread or which apples are the best? That’s where our pre-packed basket (our index fund) comes in handy.
The first major reason to invest in index funds is convenience. You don’t need to spend countless hours researching and choosing individual companies to invest in. You’re getting a bit of everything in one neat package, saving you a lot of time and effort.
Another reason is diversification. Think of it like a diet. If you only eat one type of food, you might miss out on the nutrients other foods offer. It is the same with investments. If you only invest in one company or one type of asset, you might miss out on the growth and profits that others may offer. Plus, if that one company doesn’t do well, you could lose a lot. An index fund, with its mix of different investments, can help protect you from this. It’s a bit like having a balanced diet for your finances!
Cost is another factor. Investing in an index fund is typically cheaper than buying lots of individual investments. It is like the difference between buying a pre-packed basket of groceries versus buying each item individually. With the latter, you might end up paying more for packaging, labels, and the like. It’s the same with investing. Index funds usually have lower fees than if you were to buy and manage all those investments separately.
And lastly, it is about simplicity. Imagine trying to keep track of hundreds of different investments – checking each one’s performance, dealing with paperwork for each, and so on. It’s like trying to cook a hundred different dishes at once! With an index fund, you’re effectively getting one ‘dish’ that’s made up of hundreds of different ‘ingredients’. It is much easier to manage and keep track of.
So, by investing in index funds, you’re not just saving time and effort; you’re also spreading your risk, keeping costs low, and making life simpler! It is like getting the best parts of the investment world all in one basket.
Now that we’ve got a handle on index funds, let’s introduce a new player to our supermarket scene: the ETF or Exchange-Traded Fund. Imagine this as another type of pre-packed basket, only this one has some nifty features that our regular index fund basket doesn’t.
Firstly, while index funds and ETFs are similar – both are baskets of investments that follow an index – there are differences in how you can buy and sell them. Imagine you’re shopping in a supermarket where you can only check out once a day, at the end of the day, no matter when you arrive or finish shopping. That’s how index funds work. You can only buy or sell shares in the fund at the end of the trading day when the price is set.
Now, what if you could check out any time you want, with prices changing throughout the day based on what people are willing to pay? That’s more like an ETF. ETFs are traded on an exchange, just like individual stocks, which means their price can fluctuate throughout the day, and you can buy or sell them whenever the market is open.
Secondly, consider the minimum investment required. Going back to our supermarket, let’s say the pre-packed basket (index fund) requires you to spend a certain minimum amount, but the special basket (ETF) lets you spend as little or as much as you want. This feature of ETFs can be appealing, particularly for those who are just dipping their toes into the investment waters and might not have a lot of capital to start with.
But remember, just like when you’re shopping, it’s not just about convenience and price. It’s also about what’s inside the basket and whether it suits your needs. Both index funds and ETFs offer a diversified selection of investments. Whether one is better than the other for you depends on your individual circumstances - how much you want to invest, how often you want to be able to buy or sell, and what exactly you’re looking for in your investment ‘diet’.
And just like when you’re choosing a supermarket or a diet, it’s always a good idea to do your homework before deciding on an index fund or an ETF. After all, you’re not just shopping for groceries here – you’re shopping for your future!
Our journey through the world of index fund investing is taking another turn. Let’s imagine we’re at our favourite bakery. You see two types of cakes: one you can only savour in the bakery (income), and another you can take home to enjoy later (accumulation). In the world of index funds and ETFs, you have to choose between an ‘income’ and an ‘accumulation’ version of a fund.
When we talk about ‘income’ funds, think about it like this: you’re investing in a group of companies, and these companies are profitable (hooray!). So, they decide to share these profits with their investors - that’s you - in the form of dividends. Now, if you’re invested in an ‘income’ fund, these dividends are handed over to you, usually as cash deposited into your investment account. Just like how you can enjoy that cake right in the bakery, income funds allow you to reap and use the benefits of your investments in the here and now.
On the other hand, we have ‘accumulation’ funds. Let’s go back to our bakery. This time, you decide to take your cake home for later. This mirrors what happens in an accumulation fund: instead of handing you the dividends, the fund automatically reinvests these profits back into the fund, buying more of the ‘cake’ for later. You won’t see a cash deposit in your account, but the value of your investment will increase because you now own a larger slice of the fund. Essentially, you’re allowing your investment to grow and compound over time, hopefully leading to a bigger cake for you to enjoy in the future.
So, whether you should choose an income or an accumulation fund will depend on your personal circumstances and what you want from your investments. Do you need the cash now, perhaps for a regular income? Then the income fund might be the better choice. But if you’re in it for the long haul and want to benefit from the magic of compounding, you might want to consider the accumulation fund. And remember, there’s no one-size-fits-all answer. Your choice of cake depends on your own unique taste.
There are two ways to build an index fund portfolio. The first is by creating your own version of Bogleheads’ three-fund portfolio, and the second is by simply investing in an index fund that tracks the whole world.
A three-fund portfolio is a simple passive investing strategy that involves investing in three types of index funds or ETFs with a long-term horizon of at least 20 years.
The three funds are typically:
Here is an example of how this could look in practice:
Fund 1 could be an index fund or ETF that tracks the local UK market, i.e. a fund that tracks the FTSE UK All Share Index.
Fund 2 could be an index fund or ETF that tracks the global (developed world + emerging market) or US “total” stock markets. For example, a fund tracking the S&P 500 Index.
Fund 3 could be an index fund or ETF that tracks the performance of UK government bond indices such as the Bloomberg UK Government Inflation-Linked Float Adjusted Bond Index.
Once you’ve chosen your index funds or ETFs, you have to adjust the allocation of each fund based on your risk tolerance. For instance, a risk-averse investor might hold a portfolio heavily tilted toward bonds. Similarly, someone bullish on the US or an emerging market like China might hold a portfolio that disproportionately favours a US or global index fund. Finally, if you would like a great deal of “home stocks” in your portfolio, you might allocate the largest portion of your portfolio to the UK index fund.
Other factors to consider when building an index fund portfolio include your current age and how long you plan to hold the index funds. You should also consider the previous performance of each index fund while keeping in mind that past performance is not a reliable indicator of future results.
The Bogleheads’ three-fund portfolio was originally created by Bogleheads in America.
If you are the kind of investor who would prefer a single index fund to set and forget rather than invest in multiple funds, a global index tracker might be a good choice for you.
Global index tracker funds track the performance of companies worldwide, ranging from developed countries to emerging markets.
When you buy an index fund that tracks a global market, you gain exposure to companies in the US, the UK, other developed countries, and even emerging markets like Latin American countries. Global index trackers are an excellent choice for people who want a highly diversified portfolio without limiting themselves to the domestic and US markets.
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.
Here are some advantages of investing in index funds:
Here are some disadvantages of investing in index funds:
We’ve outlined some typical index fund fees below. You can always find the full details of an index fund’s charges in its Key Investor Information Document (KIID).
Pro Tip: Fixed fees tend to work out cheaper for people investing high amounts, whereas percentage-based fees tend to be less expensive for those with little to invest.
Here is a breakdown of the fees you pay when investing in index funds in the UK:
To buy index funds in the UK, you need to:
Here are the top 10 index funds to invest in, along with their respective ongoing charges figure (OCF):
To view the comprehensive list, see Best Index Funds in the UK.
You can buy index funds in the UK from the following investment platforms:
The best way to invest in index funds in the UK is to open an investment account with a reliable fund supermarket, such as AJ Bell, Interactive Investor, or Vanguard. These platforms offer a range of index funds to choose from. After funding your account, you can select and purchase the index funds that fit your investment strategy. Additionally, consider investing through a tax-efficient wrapper like a Stocks and Shares ISA or a personal pension. For instance, if you invest in an index fund within an ISA, you won’t pay tax on any profit you make on your investments up to £20,000 per tax year.
Investing in the S&P 500 index fund can be a smart choice for those looking for exposure to the American stock market. This index fund tracks the performance of 500 of the largest US companies, offering a diversified portfolio. It is like owning tiny pieces of prominent firms like Apple, Amazon, and Microsoft all at once. While no investment is without risk, historically, the S&P 500 has provided stable long-term returns.
Absolutely! Even though the S&P 500 index is based on American companies, as a UK investor, you can easily buy an S&P 500 index fund through many investment platforms or fund supermarkets. It is a great way to diversify your portfolio with companies from the world’s largest economy.
The cheapest S&P 500 index fund in the UK is the UBS S&P 500 Index Fund which has an Ongoing Charges Figure (OCF) or Total Expense Ratio (TER) of just 0.09%. This low fee means more of your money is invested in the fund, potentially leading to higher net returns.
To invest in the FTSE 100 index fund in the UK, you need to open an investment account with a reputable fund supermarket such as AJ Bell or Interactive Investor, deposit funds, and then search for a FTSE 100 index fund. The FTSE 100 tracks the 100 largest companies listed on the London Stock Exchange. Think of giants like BP, GlaxoSmithKline, and Unilever. Remember to consider your risk tolerance and investment goals before investing.
Yes, earnings from index funds in the UK are subject to tax. However, using tax-efficient wrappers like ISAs or pensions can help reduce your tax liability. For instance, investing in an index fund within a pension plan will allow your investment to grow tax-free until you retire and start drawing a pension.
Yes, many UK index funds do pay dividends. These are portions of the company’s profits passed on to shareholders. Imagine you’re invested in an index fund that includes a successful company like Tesco. When Tesco makes a profit and decides to distribute dividends, you’ll receive your share. Depending on the fund, these dividends may be automatically reinvested back into the fund (an accumulation fund) or paid out to you as cash (an income fund).
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