This fund is now the cheapest global tracker

Fund firm Invesco is cutting the yearly fee on its global equity exchange-traded fund (ETF) from 0.19% to 0.05% from 1 April.

This makes the Invesco MSCI World ETF (LSE:MXWO) the cheapest way for investors to gain exposure to the MSCI World Index, which contains large and mid-cap stocks across developed-market countries.

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However, it’s important to note that the ongoing charges figure (OCF) excludes transaction costs – when trackers buy and sell holdings in order to rebalance weightings – so is therefore not the full all-in cost.

However, for a global tracker fund, transactions costs are typically low due to investing in large companies, and in the case of MXWO its latest cost disclosure document shows yearly transaction costs of 0.03%.

This puts MXWO at a cheaper price versus UBS Core MSCI World ETF USD acc GBP (LSE:WRDA) and State Street SPDR MSCI World ETF GBP (LSE:SWLD), which have respective annual fees of 0.06% and 0.12%.

Open-ended fund Fidelity Index World also costs 0.12% to track the MSCI World index.

However, often proving more popular with retail investors, despite its higher fee, is iShares Core MSCI World ETF USD Acc GBP (LSE:SWDA). It tracks the same index – the MSCI World – for a yearly fee of 0.2%.

For those who want their global exposure to include emerging markets, the funds can be slightly more expensive.

For example, there’s the iShares MSCI ACWI ETF USD Acc GBP (LSE:SSAC), which charges 0.2%. Alternatively, the Vanguard FTSE All-World ETF USD Acc GBP (LSE:VWRP) charges a slightly lower 0.19%. However, HSBC FTSE All World Index costs just 0.13%.

In contrast to many of its competitors, the Invesco MSCI World UCITS ETF is “synthetic”. This means that unlike a physical ETF, it doesn’t own any of the shares in the index it’s following.

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Instead of buying the shares, the index is replicated through so-called swap transactions. This means that the ETF provider enters into an agreement with a financial institution that’s then obliged to deliver the index return.

The main risk is “counterparty risk” - or risk that the bank offering the derivative will not be able to honour the contract due to its own internal problems. Fund managers can limit this risk by using multiple counterparties.

However, the benefits of this approach is that it can keep costs down versus physical replication, since it can keep a lid on certain taxes, such as those on company dividends in the US.

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Chris Mellor, head of Europe, the Middle East, and Africa ETF equity product strategy at Invesco, says: “Cost is just one side of the investment coin; the product also needs to perform. The swap-based replication model employed by our Invesco MSCI World UCITS ETF is the same as the one used on our $49 billion (£37 billion) S&P 500 UCITS ETF – the largest swap-based ETF in the world.

“Since 2018, this model has benefited from a reduced dividend withholding tax rate in certain markets, worth around 0.05% per year versus physically replicated funds for the MSCI World exposure.”

ETFs will almost never provide the exact same return as the index they are tracking, mainly due to the fund charge that’s levied. As a result, investors in an ETF will receive a slightly lower return than the underlying index. This is known as the “tracking difference”. The smaller the tracking difference in percentage terms, the better.

Costs have the most significant impact, accounting for most of the deviation from the index in question. The tracking difference can also be affected by transaction and rebalancing costs.