British index funds fall into two categories: cheap and expensive. Index funds are supposed to be cheap. Many UK financial firms, however, have found a way to make sizable profits from indexes—at the investor's expense. Richard Branson's Virgin Money was one of the first.
In his autobiography, Losing My Virginity, Sir Richard says, “After Virgin entered the financial‐services industry, I can immodestly say it was never to be the same again.…We never employed fund managers…since we discovered their best‐kept secret: they could never consistently beat the stock‐market index.”1
Virgin created its own index tracker funds, charging plenty in the process. The company's FTSE tracker fund costs 1 percent per year. Such a cost is low compared to portfolios of offshore pensions. But for an index fund, it's higher than one of Branson's balloons. In contrast, Vanguard UK's FTSE equity index costs just 0.08 percent.2
Vanguard charges low fees because, unlike Virgin, its investors (everyone who buys its funds) actually own the company. It's run much like a nonprofit firm. Tracking errors are also low because the company is an experienced index fund builder. If the stocks in the FTSE All Share Index rise by 10 percent, Vanguard's tracking index should earn roughly 9.92 percent, trailing the market by its 0.08 percent management fee. If it earned a result lower than 9.92 percent, in this case, the fund managers would be to blame. Any additional ...