09 Sept 2026
For every complex problem there is an answer that is simple, clear and often wrong. So it is with equity index funds and fees. Investors may be drawn to the cheapest Ongoing Charges Figure (OCF) as they believe their interests are best served by having the lowest fees possible. After all, for funds that track an index, how much impact can other factors have?
The answer, it turns out, can be quite a lot.
Logically, good client outcomes for equity index tracking funds should be judged less by OCF than by tracking difference - a measure of how closely a fund tracks its index - as this gives a truer reflection of the ‘cost’ of ownership. However, comparing tracking difference between funds is complicated. It is therefore understandable that investors gravitate towards a lower OCF, but this does not give a full picture of the total cost of ownership.
As with active funds, extensive due diligence is critical and asking the right questions can lead to better investment outcomes. Here are some of the key factors that we think should be considered when selecting equity index funds.
Index selection: Be mindful of the differences in exposure between funds and indices that might be similar in name. Beware of doubling up or being under-exposed if mixing and matching different equity index funds.
Costs and charges: You can screen on OCF, but don’t make that your only criteria. Consider also whether an OCF is fixed or variable, and whether it represents value in terms of the sum of its parts. Also, look at the impact of synthetic costs, as well as the impact of portfolio transaction costs on the overall cost outcome. Understanding a manager’s dilution policy, and quantifying their dilution cost, is another important step because dilution costs can be many times the size of annual ongoing charges.
Fund domicile and taxation: UK-domiciled funds generally offer UK investors better withholding tax treatment than cross-border funds distributed into the UK. From a performance measurement perspective, be aware of the tax treatment of the specific index variant being used and how this compares to the fund. The index variant will not necessarily be apparent, so you might have to ask the question, but it’s important in assessing how accurate the reported tracking difference in fact is, and therefore how this informs fund selection.
Valuation time: Analyse any mismatch between the time the fund is valued and the time the index is valued. Is a custom midday index necessarily a midday index? If there’s a mismatch, any tracking difference or tracking error measurement is going to be inaccurate. You cannot rely on third party vendor data that doesn’t take into account valuation time mismatches and might be impacted by dilution adjustments. You also cannot rely on all manager factsheets. For accuracy and comparability, ask for manager mid-priced, or unswung, market closing equivalent fund prices, and compare those to standard gross total return indices to level the playing field.
Liquidity: Bear in mind dealing holidays even on UK business days, as well as advance dealing cut-offs, and what this means for your ability to allocate from one regional equity index fund to another, without time out of market.
Fair value policy: Just because a prospectus says a manager can do it, doesn’t necessarily mean they do. You really need to ask for their policy. Managers have to be careful not to be so transparent that they enable any arbitration of this investor protection, but they should be able to articulate their policy to provide comfort that it is being employed responsibly.
Stock lending: The key question here is whether you have sufficient ongoing transparency to be able to judge the reward versus the risk and complexity it adds to the investor proposition. We suggest you gain an understanding of the net uplift to the fund i.e. what’s in it for the investor, and assess whether this is reasonable versus what the manager is taking.
Client reporting: How does fund performance compare to index performance in client reporting? Manager factsheets should evidence to investors that index funds are meeting their tracking objective. However, there are several factors that can affect what’s shown, and many managers fail to adequately address the difference in valuation time when comparing tracker fund performance with index performance in their client reporting.
Execution: Switching between funds, or inadvertently share classes of the same fund, may involve ‘cost’, whether that’s opportunity cost, anti-dilution cost or taxation cost. These costs can dwarf the difference of a basis point or two in annual OCF. To ensure good outcomes are delivered for underlying retail investors in accordance with the FCA Consumer Duty, rigorous due diligence should be performed to check the benefits outweigh the costs. It is advisable to discuss your intentions ahead of time with your fund manager, and your platform(s), particularly when switching involves larger amounts.
Our research paper explores in more detail why these aspects should be important due diligence considerations. Raising awareness of these issues should help our professional clients avoid some of the pitfalls that can distort the comparability of tracking difference across different fund providers. We hope that improving equity index fund due diligence will ultimately lead to better investment outcomes for their own clients.
We would be very happy to discuss any of these issues with you in more detail. Please get in touch with your usual Fidelity representative for further information.
Click here to download our full white paper on what to watch for when selecting equity index funds.