How to build an index tracker ISA portfolio

What is an ISA tracker portfolio?

Put simply, it’s a portfolio of index tracker funds, held inside a Stocks and Shares ISA.

• An ‘index’ is simply a list of top companies within a particular market or sector. 
• An index tracker fund simply follows the performance of that index. If the value of the market goes up or down, so does your ISA value.

Building an ISA tracker portfolio is an easy and low-cost way of introducing yourself to investing. You can build one by choosing to invest in a range of index trackers that follow the FTSE 100 Index, the MSCI World Index, or the S&P 500 Index to name a few. You could also focus on one group of indexes, like for example a FTSE index tracker ISA.

You can find several index tracker funds in our ii Super 60 list.

Index trackers are often considered lower-risk investments since they spread your money across many shares – thus reducing the risk of a single company underperforming.

Some index trackers are more adventurous than others. An index tracker following the up and down fortunes of developed markets, such as the US and UK, is likely to give investors a smoother ride than an index tracker investing in emerging markets, such as China and India.   

Choosing tracker funds in your ISA is also low-cost as the funds require much less management than actively managed funds.

How does an ISA tracker portfolio work?

A tracker ISA aims to match the performance of one or more indices over time. 

For example, if you invest in a MSCI World Index tracker then your investment’s performance should follow how that index performs. This is because your money is spread over a number of companies in that fund. The tracker fund will by definition slightly underperform the index, due to its annual fee. 

The number of companies in a tracker depends on the size of the index. For example, a FTSE 100 tracker could easily invest your money in all 100 companies in the FTSE 100 index. However, the MSCI World Index contains over 1,700 companies – so an MSCI tracker will take a sample of the biggest companies in the index to closely match its overall performance.

Once you’ve chosen a few trackers to invest in, you’ll have an ISA tracker portfolio that spreads risk across different sectors and regions.

What are the benefits of an ISA index tracker portfolio?

Building a tracker portfolio within your ISA comes with several benefits: 

• Invest in a whole sector or region – so you don’t need to worry about a single company’s performance.
• Diversify your entire portfolio in a few simple clicks.
• You’ll pay lower charges – tracker funds can cost as little as 0.1% while actively managed funds cost around 0.85%. These charges are described as the Ongoing Charges Figure (OCF) and do not include trading costs. When researching tracker funds, look out for the Cost Disclosure Document (CDD) for a full breakdown of charges.
  

How to build an index tracker ISA portfolio

To build an ISA tracker portfolio, you’ll need to choose which Index Trackers you like based on your goals and values. 

Many investors simply choose to invest in a single tracker fund since this will give them broad exposure to a market. However, choosing several trackers covering markets you believe will perform well could be a winning strategy.

We feature a handful of the most popular trackers on our Super 60 investment list: 

• Vanguard US Equity Index Fund - aims to track the performance of the S&P Total Market Index.
• iShares Core MSCI World ETF - seeks to track the performance of the MSCI World Index.
• HSBC Japan Index (Class C) Accumulation Fund - provides broad exposure to Japan by tracking the return from the FTSE Japan Index. 
• Vanguard U.K. Government Bond Index Fund - tracks the Bloomberg Barclays UK Government Float Adjusted Bond Index.
• Vanguard FTSE All-World High Dividend Yield UCITS ETF  - tracks the FTSE All-World High Dividend Yield Index.
• Fidelity Index UK (Class P) Accumulation Fund - aims to track the performance of the FTSE All-Share Index. 
• Vanguard FTSE U.K. Equity Income Index Fund - physically invests in the constituents of the FTSE UK Equity Income index.
• iShares Global Property Securities Equity Index Fund -  tracks the FTSE EPRA/NAREIT Developed Index.
  

Building a US or international tracker portfolio for my ISA

Global trackers are an easy way to get full exposure to the world market within your ISA. ‘World trackers’ tend to avoid or have a low amount invested in emerging markets, but these are included in anything labelled ‘Global’ or ‘All-World’. However, you could choose a developed world tracker and add an emerging world tracker to your portfolio to cover a greater market.

Being passively managed funds, these trackers will be low-cost. But it’s worth looking up their Ongoing Charge Figure (OCF). 

If you think the US markets will outperform global performance, then you can pick trackers that exclusively track US indices such as the S&P or NASDAQ. However, remember that a diversified portfolio lowers risk. 

Find out more : Buying US shares in a UK ISA.

How to build a sector tracking ISA portfolio

Index trackers don’t only have to track the performance of a whole region. You can also find trackers that chase returns in a specific sector.

For example, the L&G Global Technology Index tracks the performance of companies engaged in information technology. The L&G Global Health & Pharma Index on the other hand tracks the performance of companies engaged in health, pharmaceuticals, and biotechnology.

Other popular sectors include energy, raw materials, financials, utilities, and property among others.

Building a sector tracking portfolio within your ISA could be beneficial if you’ve researched the sector thoroughly and understand the risks. Costs may be slightly higher than global trackers and limiting yourself to a single sector could limit your portfolio’s diversification.