Here’s how I chose a global tracker fund

If you are investing in a tracker fund that, say, follows the FTSE 100, does it really matter which one you choose? It’s a bit like choosing whether to buy your milk at Tesco or Sainsbury’s — it all comes from the same place, after all.

Only all trackers are not equal, no matter what they say on the label. And if you are after something specific, you need to do your homework.

Essentially all tracker funds are doing the same thing: trying to copy the holdings and overall performance of a chosen index — be that the S&P 500, for example, or the Dow Jones.

About 80 per cent of my investment portfolio sits in one global tracker fund, a fact I admitted to last week, prompting some to ask: which one.

It’s a good question, because selecting one may be more difficult than picking an actively managed fund — ie one that holds stocks specially selected by a fund manager, instead of simply using an algorithm to replicate an index.

There are, for example, 225 funds in the UK All Companies investment sector, according to the investment website Trustnet. The broad remit of all of these funds is to invest in UK equities. Yet the way in which they do this will vary greatly — one manager may prefer value stocks over growth, or like banks over energy firms, for example — and this leads to different levels of performance. Over the past year the best performing UK All Companies fund is up 27.3 per cent and the worst is down 5 per cent.

But the differences between trackers are not always so apparent.

The obvious first step is to decide which index you want to track. I wanted to construct an investment portfolio with a very broad tracker at its core, which would give me diversified exposure to a whole range of regions and sectors. The idea is that I could then play around with some so-called satellite holdings (extra investments on top of my tracker) for more specific exposure around the edges.

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That meant I had to go global. But the global index is heavily skewed to the US and big tech stocks, because they have the greatest market cap.

If you want to remove this bias, you could choose an equal-weighted tracker. This is where an equal proportion of the fund is invested in every stock in the portfolio. But in a portfolio of 7,000 stocks, that means each one would only get an allocation of about 0.01 per cent, which is spreading things a little too thin for my liking.

So while I can see the logic of an equal-weight strategy, here’s my thinking: these companies did not become the biggest, most successful businesses on the planet by accident. So it makes sense to have more of your money in them.

I went with the standard “market-cap weighted” approach, which essentially means that the bigger the company, the bigger the proportion of the portfolio they account for. Microsoft, the top holding in my fund, accounts for 4 per cent of assets.

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This is where we get into the problem of diversification. The top 10 holdings of my fund account for 19 per cent of its assets and include the usual suspects of Apple, Nvidia and Amazon. You could make a very reasonable argument that this fund is indeed US-centric and tech-heavy.

But actually, it is not as skewed as other trackers. The fund that I chose is an “all cap” fund which invests in companies right across the market cap spectrum. Smaller companies make up about 5 per cent of assets in my fund, but are completely excluded from many global trackers.

Of course, smaller companies in this context can mean businesses worth up to $2 billion, but that’s a drop in the ocean compared with Apple’s $3.3 trillion valuation. Meanwhile, mega-caps (worth $10 billion or more) make up 43 per cent of my fund’s portfolio, compared with an average of 63 per cent for similar funds. My exposure to Asia is also considerably higher than the average at 17 per cent versus 9.7 per cent.

Maybe that all sounds like splitting hairs but I believe it brings an extra layer of diversification. It also provides a smidge of protection when markets tumble as they briefly did last week.

I am not under the delusion that this is all the exposure to small-caps or Asia that a portfolio needs, but if it spreads a bit more of my risk away from those Magnificent Seven tech stocks, then I’m happy.

Next? Look at annual charges, of course — the lower, the better. Consider tracking error, a measure of how closely your fund mimics its index. Look at assets under management; nothing too small. Check the currency (some trade in dollars, which will affect your returns) and if you want to grow your money, select accumulation units, where any dividends are reinvested, rather than income funds. You might have a preference over whether your tracker is structured as an open-ended fund or an exchange-traded fund, which is listed on the stock market, and so gives you a little more control over exactly when you buy and sell.

From here, there is only really one decision left to make: which fund house do you want to run your tracker? This is just a case of choosing a brand you trust, the same as you choose where to buy your milk. In reality, the difference between an iShares, Fidelity or SPDR tracker with the same framework is likely to be minimal.

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So, have you guessed my fund? Some of you already did. It’s the Vanguard FTSE Global All Cap Index. It charges 0.23 per cent (though I pay a platform fee on top of this), automatically reinvests dividends, and so far seems to be serving me well.

It is not the only investment I want in my portfolio — after all, you’ve got to have some fun — but I am happy to use it as the main building block for the rest.