Index Funds, ETFs & Mutual Funds
Why most people are better off NOT picking individual stocks
The Problem with Stock Picking
Here’s an uncomfortable truth: the vast majority of professional fund managers — people who do this full-time with teams of analysts — fail to beat the market average over the long term. If the pros can’t do it, what chance do the rest of us have?
The solution? Buy the entire market instead.
What Is an Index Fund?
An index fund is a basket of shares that mirrors an index — like the FTSE 100 or S&P 500. Instead of picking winners, you own a slice of every company in the index. If the market goes up 8%, your fund goes up roughly 8% (minus tiny fees).
Key Concept
An index fund doesn’t try to be clever. It just owns everything in the index. That boring strategy has beaten most “clever” fund managers over every 20-year period in history.
ETF vs OEIC / Unit Trust
| Feature | ETF | OEIC / Unit Trust |
|---|---|---|
| Traded | Like a share, any time markets are open | Once per day at a set price |
| Minimum investment | Price of 1 share (can be £5–£500) | Often £100 or £500 |
| Fees | Usually very low (0.03–0.22%) | Low for passive (0.06–0.25%), higher for active |
| Best for | Lump sums, frequent traders | Monthly contributions, simplicity |
Active vs Passive: The Great Debate
Active fundsemploy a manager who picks stocks, trying to beat the market. They charge 0.5–1.5% per year for this privilege.
Passive funds(index funds) simply track an index. They charge 0.03–0.25% per year because there’s no expensive manager to pay.
Real-World Example
Over 15 years, a 1% fee difference on a £50,000 portfolio growing at 7% costs you roughly £30,000 in lost returns. That’s not a rounding error — it’s a car.
Popular UK Index Funds
- Vanguard FTSE Global All Cap Index Fund — owns 7,000+ companies worldwide. The “one fund to rule them all.” OCF: 0.23%
- Vanguard FTSE 100 Index Fund — UK’s 100 biggest companies. OCF: 0.06%
- HSBC FTSE All-World Index Fund — similar global coverage. OCF: 0.13%
- Fidelity Index World Fund — developed markets. OCF: 0.12%
- iShares Core MSCI World ETF (SWDA) — popular ETF option. OCF: 0.20%
The Expense Ratio (OCF)
The Ongoing Charges Figure (OCF) is the annual fee taken from your investment. You never see a bill — it’s deducted automatically from the fund’s value. Lower is better. Anything under 0.25% is excellent.
Warning
Watch out for platform fees on top of fund fees. Some platforms charge a percentage (e.g., 0.25% at Vanguard) while others charge a flat fee (e.g., £5.99/month at InvestEngine). For larger portfolios, flat fees are usually cheaper.