Index Funds in the UK: A Comprehensive Guide

With thousands of stocks available in the UK and internationally, beginner investors can find the concept of investing challenging. This is where products such as index funds can be useful. Instead of investing in many stocks, investors can invest in a fund which holds a basket of different stocks.  

Index funds in the UK can be an effective tool for new investors and those building long-term retirement portfolios in a low cost and diversified way. This in-depth article will cover, what index funds are, how investors use them to gain exposure to the performance of the stock market, a few popular funds to keep an eye on and how to invest in them.

What Are Index Funds?

Did you know that the value of index funds globally is now well over a trillion pounds? As the value of stock markets have risen around the world, the demand for index funds has as well. But what are they and how do index funds in the UK work?  

The definition of an index fund is simple an investment vehicle that is designed to mirror the performance of a particular market index. Its purpose is to offer shares to investors to invest in the fund, enabling them to receive the performance of the market index it is tracking without having to purchase all the individual shares themselves. 

How Do Index Funds Work

As stated above, the primary goal of an index fund is to replicate the performance of the specific market index it is tracking. A popular stock market index in the UK is the FTSE 100. This index measures the performance of the largest 100 shares listed on the London Stock Exchange and is widely quoted on news channels and radio stations in the UK.  

A common index fund in the UK is one that tracks the FTSE 100 index. The index fund does this by purchasing all the constituent stocks listed in the FTSE 100 index. As the shares within the FTSE 100 index change over time, the fund will automatically update the positions it holds accordingly. This means that to receive the performance of the FTSE 100 index, investors do not need to purchase the 100 stocks themselves but instead purchase shares of the index fund.  

An index fund is a product created by asset management and investment companies such as Vanguard, Fidelity, Legal and General, BlackRock and many others. They offer different index funds to investors and charge a fee to manage the fund passively, which is different to the typical active management style. What's the difference? Let's find out. 

Passive vs Active Management

There are two different ways to invest: passive investing and active management.

• Passive investing represents funds that merely replicate the performance of a specific market index rather than trying to outperform it. These funds offer a low-cost solution to investing as they are not actively managed.  
• Active management represents funds managed by a portfolio manager and a team of research analysts. They select the investments to try and outperform a specific market index. Due to the human capital involved, these often have higher investment fees.   

Popular Index Funds in the UK

There are thousands of index funds available in the UK. Some of these funds can help you to receive the performance of stocks markets from around the world not just the UK. Therefore, investors can gain exposure to the stock market in the United States, Europe, Japan and elsewhere.  

Below is a small selection of popular index funds in the UK. When it comes to choosing an index fund UK, it is important to do thorough research and fully understand the risks involved. You should not invest with funds you cannot afford to lose. 

Vanguard FTSE 100 Index Fund

Vanguard is an investment management company founded in 1975 by John Bogle. It pioneered the concept of low-cost index funds and is one of the world's largest producers of them. One of the funds they offer is the Vanguard FTSE 100 Index Fund. This fund aims to mirror the performance of the FTSE 100 index, which represents the performance of the 100 largest companies listed on the London Stock Exchange.  

Key Facts:

• Fund Size: £1.2 billion 
• Ongoing Charge: 0.06% 
• Risk Level: 6 

The fund size is relatively large and it is currently worth over £1.2 billion. The top five holdings in the fund and the percentage of the fund they hold are AstraZeneca (8.33%), Shell (7.32%), HSBC Holdings (5.94%), Unilever (5.72%) and RELX (3.15%).  

Vanguard is known in the industry for offering some of the lowest management fees for their funds. The ongoing charge of 0.06% is relatively low. This charge is not paid directly but is instead already calculated into the cost of purchasing shares in the fund.  

All index funds use an industry standard risk scoring known as the Synthetic Risk and Reward Indicator (SRRI). 1 represents low risk and 7 represents high risk. Therefore, this Vanguard fund is considered to be more high risk, as it scored 6 out of 7 on the SRRI rating.  

The performance of the fund has mirrored the performance of the FTSE 100 Index closely, resulting in some positive and negative years, as shown below.

Due to the fund's popularity, many brokerage platforms offer the option of investing in it. With FCA-regulated broker Admiral Markets, investors can purchase Vanguard FTSE 100 ETF (VUKE) shares with a commission of just 0.1% of the total investment value and a low minimum commission of £1.

HSBC FTSE All-World Index Fund

Most people associate HSBC as a high-street and online bank. However, the bank has many different divisions. Part of the HSBC Group is HSBC Investment Management which offers a range of investment services including different types of exchange-trade funds (ETFs). An ETF is a fund which has shares listed on a stock exchange for investors to buy and sell.  

One of its funds is the HSBC FTSE All-World Index Fund which aims to track the performance of the FTSE All-World Index. This index tracks the performance of stock markets in developed and emerging markets worldwide. It currently holds 3,497 stocks in the fund.  

Key Facts:

• Fund Size: £4.27 billion 
• Ongoing Charge: 0.13%
• Risk Level: 5

The fund is relatively large with around £4.27 billion worth of assets. This is because the fund has invested in 3,497 stocks from around the world including the United States, Japan, Mainland China, the UK, India and many others. The top five stocks in the fund and there weighting include Apple (4.16%), Microsoft (3.93%), NVIDIA (3.49%), Alphabet (2.21%) and Amazon (2.13%).  

Some investors may have some ethical considerations when investing into an all-world fund. This is because the fund has investments in emerging markets which may not have the best human rights record. It also has investments in industries such as chemicals, mining and oil that may not comply with a socially responsible investing methodology. This is why identifying your investing style is important when starting out. 

The fund's performance has closely mirrored the FTSE All-World Index performance as shown below.  

iShares Core FTSE 100 UCITS ETF

iShares is a provider of exchange-traded funds (ETFs) managed by BlackRock which is one of the largest asset management companies in the world and the largest provider of ETFs in the United States. It currently has over 1,400 funds and manages over $204 billion.  

One of its funds is the iShares Core FTSE 100 UCITS ETF which aims to mirror the performance of the FTSE 100 Index in the UK. 

Key Facts:

• Fund Size: £11.8 billion 
• Ongoing Charge: 0.07% 
• Risk Level: 6 

The iShares Core FTSE 100 ETF is very large with £11.8 billion in assets. It also has a low ongoing charge, also known as the total expense ratio (TER), of 0.07%. The fund is also very transparent by releasing an annual report highlighting any tracking differences. Due to market volatility, liquidity and fees there may be a slight difference between the fund's performance and the index it is tracking.

The iShares Annual 2024 Report shows a tracking difference from its benchmark index of 0.07% which means it mirrors the index closely. The iShares Core FTSE 100 fund offers high liquidity and trading efficiency due to its significant daily trading volume, averaging 3.1 million shares. This liquidity means investors can buy or sell shares in the fund with a lower spread (the difference between the buy and sell price) due to there being more buyers and sellers active in the market.

Currently, the fund has a dividend yield of 3.74% but this changes daily, as it is based on the fund's share price. However, on top of any potential capital growth investors can receive an extra 3.74% interest on their holdings annually.

With Admiral Markets, investors can purchase iShares Core FTSE 100 ETF (ISF) shares with a commission of just 0.1% of the total investment value and a low minimum commission of £1.

Legal & General UK 100 Index Trust

Founded in 1836, Legal & General is a well-known insurance company in the UK but also offers other types of financial products including investment products. One of its products, launched on 28 May 1993, is the Legal & General UK 100 Index Trust which aims to track the performance of the FTSE 100 Index on a net total return basis before fees and expenses.  

Key Facts:

• Fund Size: £1.95 billion
• Ongoing Charge: 0.10%
• Risk Level: 6

The fund is relatively small when compared to others in the industry and has a slightly higher ongoing charge than others. However, it has a good tracking performance with the index with a relative difference of only -0.26 over a five-year period.

The fund's risk level is 6 out of 7, using the industry standard SRRI indicator. The rating means the fund invests in company shares, which can generally provide higher rewards but with higher risks compared to other investments such as bonds or cash.

Vanguard S&P 500 Index Fund

One of the world's most recognised funds is the Vanguard S&P 500 Index Fund due to Vanguard being one of the largest issuers of ETFs and the S&P 500 being the largest stock market in the world. In one of Warren Buffett's letters to Berkshire Hathaway shareholders, he recommends investing in a low-cost S&P 500 index fund, as even hedge fund managers can fail to beat it.

The Vanguard S&P 500 Index Fund offers a passive management approach that aims to track the performance of the Standard and Poor's 500 Index (S&P 500). The index measures the performance of the largest-sized companies in the US, listed on the New York Stock Exchange.

Key Facts:

• Fund Size: £32.80 billion
• Ongoing Charge: 0.07%
• Risk Level: 6

With a size of £32.80 billion, this fund is one of the largest in the industry. The fund's top five holdings and the weighting each one has in the fund includes Apple (7.18%), Microsoft (6.48%), NVIDIA (6.06%), Amazon.com (3.53%) and Meta Platforms (2.54%).

While the fund has a relatively low historical dividend yield of 1.03%, it does provide investors with broad, diversified exposure to the US economy, which is the largest in the world. The fund has a high level of US exposure with a 100% market allocation to North America. 31% of the fund is weighted to the information technology sector, 13.3% financials, 12.2% health care, 9.7% consumer discretionary, 8.8% communication services, 8.5% industrials, 6.0% consumer staples, 3.5% energy, 2.4% real estate, 2.4% utilities and 2.2% materials.

The performance of the fund has mirrored the performance of the S&P 500 index very closely, with minimal tracking difference.

The Vanguard S&P 500 Index Fund allows UK investors to invest in the 500 largest capitalisation-weighted stocks in the US. UK investors can invest in Vanguard S&P 500 UCITS ETF (VUSA) using the Admiral Markets Invest.MT5 account with a commission of 0.1% of the total trade value and a low minimum transaction fee of £1.  

Fidelity Index World Fund

Founded in 1946, Fidelity is a multinational financial services company, offering many different types of products such as mutual funds, ETFs, retirement solutions and more. One of the funds it offers is the Fidelity Index World Fund which aims to track the performance of the MSCI World Index before fees and expenses.  

The MSCI World Index tracks the performance of large and mid-cap companies from around the world. The fund uses index tracking which is a passive investment management approach and currently holds 1,410 equities from 23 countries. 

Key Facts:

• Fund Size: £9.09 billion 
• Ongoing Charge: 0.12% 
• Risk Level: 5 

Since its launch in March 2014, the fund has seen strong long-term growth but with positive and negative years. The fund offers a high level of global diversification with 70.53% of the fund allocated to the United States, 8.63% Eurozone, 5.82% Japan, 4.8% Europe - ex Euro, 3.81% UK, 3.16% Canada, 2.02% Australasia and 0.9% to Developed Asia.

Vanguard FTSE Global All Cap Index Fund

Of the 423 funds that Vanguard offers, one is the Vanguard FTSE Global All Cap Index Fund. Passively managed, the fund aims to track the performance of the FTSE Global All Cap Index. This index was designed to measure the returns from large, mid-size and small cap stocks in developed and emerging markets around the world, offering global exposure to investors.  

Key Facts:

• Fund Size: £4.3 billion 
• Ongoing Charge: 0.23% 
• Risk Level: 5

The fund's risk level of 5 is lower than other funds as it invests in assets from all around the world which provides a more diversified exposure. Investing into just one region is considered to be higher risk as your returns are concentrated to that region only. When investing in multiple regions, if one country is not performing well it may be balanced out by another country that is performing well.  

Around 10.2% of the fund is invested into emerging markets, including China, India, Taiwan, Brazil, Saudi Arabia, South Africa, Malaysia, Mexico, Thailand, Indonesia, United Arab Emirates, Qatar, Philippines, Chile and many others. 

As the fund holds 7,121 global stocks it has a higher ongoing charge of 0.23%. Many of Vanguard's other funds have an ongoing charge of 0.06%. As investors do not need to purchase and manage all the 7,121 stocks themselves, the fund still offers a low-cost solution to the exposure of global stock markets.  

Investing Options: Share Dealing, ISAs and SIPPs

In the UK, investors have a variety of investing options. This includes a traditional share dealing investment account, or two tax-efficient investment wrappers: Stocks and Shares Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs). These allow UK investors to invest in shares and index funds with certain tax advantages but also some restrictions. 

Share Dealing Accounts in the UK

A traditional share dealing account allows UK investors to buy and sell global shares. As the account is not in a tax-wrapper, investors may be liable to pay Capital Gains Tax (CGT) on any profits made when the investment is sold.  

The amount of tax paid depends on individual circumstances and the Capital Gains Tax allowance applicable for that year. UK investors can also reduce their tax bill by reporting a loss which is then deducted from the gains made in the same tax year, reducing the overall tax paid. 

ISAs in the UK

Individual Savings Accounts (ISAs) are tax-efficient savings and investment schemes available when you're aged 18 years or above. There are four different types of ISAs which allow participants to save or invest up to £20,000 per year without paying any capital gains tax or tax on interest.

Types of ISAs Available

There are four main ISA types:  

• Cash ISA 
• Stocks and Shares ISA 
• Innovative Finance ISA 
• Lifetime ISA

Junior ISAs, a fifth type, are also available for savers under 18, but these come with a separate annual allowance.  

Annual Allowance

The current ISA maximum allowance is £20,000. This can be split between the different ISA types. Any interest earned, or capital gain made in an ISA is tax-free, which is why ISAs are considered to be tax efficient wrappers.

Withdrawal Rules

In general, you can withdraw money from an ISA at any time without losing tax benefits, but it depends on the type of ISA and provider. With a Cash ISA, money can be withdrawn at any time, with no charge for an Easy Access ISA, but there may be penalties for Fixed Cash ISAs.  

Money can also be withdrawn from a Stocks and Shares ISA and an Innovative Finance ISA, but the investments (funds, shares, bonds, etc) need to be sold. This means it can take a few days for the funds to arrive in your account. Lifetime ISAs allow money to be withdrawn for free if you're buying your first home or are over 60, otherwise a penalty will be charged.  

SIPPs in the UK 

In the UK, there are various types of pensions. One of the pensions available is a SIPP (Self-Invested Personal Pension). SIPPs allow you control over the investments within your pension and require an active management approach. In contrast, a pension received by your employer will generally be invested into a passive index fund.

Annual Allowance

SIPPs work the same way as other pension contributions and are measured against your annual allowance. Contributions to these pension funds qualify for tax relief. This is where you benefit from an extra contribution to your pension from the government. The amount of tax relief depends on the tax rate you pay.  

For a UK resident under 75, there is a tax relief of 20%. So, if you pay £800, the government will add £200 to give you a total of £1,000 in your SIPP. The maximum you pay is up to your UK earnings, subject to the annual allowance of £60,000.  

Investment Options and Withdrawal Rules

A SIPP allows different investment options, including company shares, collective investments, investment trusts, property and land.  

Withdrawals from SIPP accounts can start at the age of 55 or 57 from 2028. There are multiple options available, which depend on your age and personal circumstances, including: 

1. Withdraw your pension pot in one go. Usually, the first 25% is tax-free, the rest is taxable.  
2. Withdraw your pension pot in multiple lump sums. Usually, the first 25% is tax-free for each cash withdrawal, with the rest taxable.  
3. Use your pot for a pension drawdown. Known as a flexible retirement income, you can take 25% lump sum, usually tax-free, and use the rest to give you a regular taxable income.  
4. Use your pot to purchase a lifetime annuity, a guaranteed income for life. The income is taxable.  
5. Leave your pension pot as is and take it later in life, or mix your options.

Retirement Planning with SIPPs

Because SIPPs are self-directed, a thorough understanding of pension and tax rules is needed. The flexibility and large range of options offer advantages but also disadvantages, as the wealth of options can be confusing for beginners. 

For long-term retirement planning, it's best to seek professional advice from a regulated financial advisor who can take your specific circumstances into consideration. 

How to Invest in Index Funds UK  

With Admiral Markets, you can trade and invest in over 4,000 stocks and ETFs with the following commissions:      

• UK stocks and ETFs – 0.1% of trade value, 1 GBP minimum commission.     
• US stocks and ETFs – From $0.02 per share, 1 USD minimum commission.   
• France/Germany stocks and ETFs - 0.1% of trade value, 1 EUR minimum commission.    

You can learn more about investing commissions on the Admiral Markets Contract Specification page. You can search for global stocks and ETFs from the Admiral Markets MT5 web platform and invest in four steps: 

• Open an account with Admiral Markets.       
• Click on Trade on one of your live or demo trading accounts to open the web platform.      
• Search for your symbol at the top of the search window.      
• Click Create New Order in the bottom window to open a trading ticket to input your trade size, stop loss and take profit level.   

Importance of Broker Regulation and Compliance

Unfortunately, there are many scams in the investment industry nowadays. Therefore, when choosing a broker to invest with, it is important they are safe, secure and trustworthy.  

The regulation and compliance of investment firms in the UK is governed by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). For UK investors, it is wise to only use brokers regulated by the FCA. You can check a broker's authorisation on the FCA's online register of regulated investment firms.  

For example, Admiral Markets UK Ltd is authorised by the UK FCA.

The Role of the Financial Conduct Authority (FCA)

The Financial Conduct Authority (FCA) supervises the financial markets in the UK and has specific objectives, including:  

• Protecting consumers 
• Maintaining a stable economic environment 
• Ensuring healthy competition among financial services providers 

Regulation and Investor Protection

One of the main aims of the FCA is to ensure consumers can invest safely, with confidence, while understanding the risks involved. The UK legislation which governs investment firms and the investment services they provide is known as the UK MiFID framework. 

This framework is designed to protect investors and ensure investment firms operate in the best interests of their clients. It covers a broad range of areas such as the conditions for licensing and authorisation, rules on handling client assets, transaction reporting and the general conduct of business activities.  

One specific guideline is that customers of any FCA regulated financial services firms have access to the Financial Services Compensation Scheme (FSCS). This protects customers up to £85,000 if an authorised financial services firm fails.  

All financial services firms in the UK must be authorised, licensed and registered with the FCA. Regulated entities must adhere to strict compliance requirements set out by the FCA in its MiFID framework, creating a safer investing environment. You should stay clear of unregulated brokers. 

Complaints Procedure and Financial Services Register  

The Financial Services Register is a public record of firms and individuals that are currently or have been, in the past, authorised by the FCA. The register also lists firms that are providing regulated products and services without the required authorisations. When using an investment provider, it is good practice to check their authorisations on the FCA's Financial Services Register. 

All firms are required to have a complaints procedure in place. If customers feel like they have been part of a scam or have been treated unfairly by a financial services firm, complaints can be made. The first action should be to contact the financial services firm directly as they should have a complaints procedure in place. If this does not solve the problem, complaints can be made to the Financial Ombudsman Service (FOS).  

The FOS is an independent body that resolves disputes between consumers and financial services firms. While the FCA does not handle individual complaints, it uses the information from complaints to identify any issues with firms. Generally, complaints should be made within six months of the firm's final response to you or within six years of the initial complaint, or three years when you first became aware of the issue.  

Conclusion

Index funds offer UK investors a low-cost, passive method of investing in domestic and international markets. As index funds merely track a specific market index, they are passively managed, resulting in lower fees than actively managed funds. The diverse range of funds also means that UK investors can receive the performance of stock markets in the UK, Europe, Japan, the United States, and emerging markets.  

With Admiral Markets, UK investors can open a general share dealing account called the Invest.MT5 account. This enables you to invest in funds and shares from around the world. Investments in UK funds and shares have a commission of 0.1% of the total trade value and a low minimum transaction fee of £1.  

Ready to explore index fund investing? Start Your Investment Journey -  Open an Account Today. 

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