How to build a FTSE tracker ISA portfolio

What is a FTSE tracker ISA portfolio?

A FTSE tracker ISA portfolio is an investment portfolio of FTSE tracker funds held in a Stocks and Shares ISA. 

A FTSE tracker fund tracks the value of a FTSE index, such as the FTSE 100. It will rise or fall in value depending on the overall performance of the FTSE index it tracks. 

A FTSE (Financial Times Stock Exchange) index is a list of shares which are traded on the LSE (London Stock Exchange). For example, the FTSE 100 which comprises the 100 largest companies on the LSE. Other FTSE indexes include the FTSE 250, FTSE 350 and FTSE all-share index.

By holding FTSE tracker funds in a Stocks and Shares ISA, you will have a number of tax benefits. For example, your investment gains and UK dividends will be free from tax. 

This means building a FTSE tracker ISA portfolio can be a low-cost and tax-efficient way of investing in a range of shares. 

What are FTSE tracker funds? 

FTSE tracker funds try to match the performance of a FTSE index. For example, HSBC FTSE 250 Index C Acc tracks the FTSE 250.

They are a low-cost option as they are passive funds, which means they invest in each company in the index it tracks. This is opposed to active funds which try to beat the performance of the market. 

Several FTSE tracker funds are in our Super 60 rated list.

Benefits of FTSE tracker funds in your ISA portfolio

• Lower costs

A FTSE tracker ISA portfolio is a low-cost option for investing in funds. 

Actively managed funds, such as Fundsmith Equity or Baillie Gifford American, usually have Ongoing Charges Figures (OCFs) of between 0.5% and 1%. This is the amount the fund manager charges annually from your total investment and does not include trading fees. 

FTSE tracker funds tend to have lower annual fees – typically between 0.1 and 0.4%.

Although this difference in ongoing fees may sound small, over time it can make a big difference to the size of your investment.

• Reduced risk

If you choose FTSE trackers for your ISA portfolio, you are effectively investing in a wide range of companies. This means your investment will be less vulnerable to a sudden drop in the share price of one particular company. 

However, FTSE tracker funds can drop in value like any type of investment. 

FTSE indices are invested in UK-based companies, so can be affected by the overall performance of the UK economy. 

The FTSE 100 is a concentrated basket of the 100 biggest companies listed on the London Stock Exchange. The FTSE 250 is the next 250 biggest companies. The more companies your fund is invested in, the more diluted the risk profile of your portfolio.  

• Simplicity

Choosing FTSE tracker funds for your ISA portfolio is a simple way to invest. You can invest in a wide range of companies and sectors without having to choose individual shares. 

For example, you could build a FTSE 100 tracker ISA by investing in just one FTSE 100 tracker fund in your ISA.

• Tax benefits in an ISA

Any profits you make from your investments, including those investments in a FTSE index tracker, are tax-free in an ISA. If you were to invest in a general trading account, you would have to pay Capital Gains Tax on investment profits worth over £3,000. 

UK dividends are also tax-free in an ISA account. In contrast, you can only earn £500 in tax-free dividend income in a trading account. Anything over that threshold is taxed. 

You can invest up to £20,000 per tax year in your Stocks and Shares ISA.

Disadvantages of FTSE tracker funds in an ISA portfolio

FTSE tracker funds can be considered lower risk than individual shares. However, FTSE tracker funds can fall in value like any form of investing. If the FTSE index your fund is tracking falls in value, then your fund will fall in value as well. 

Like other types of index tracker fund, FTSE trackers will not exactly match the performance of the index it is tracking. In fact, it is likely to be marginally lower than the performance of the market after costs are deducted. 

FTSE trackers could also expose you disproportionately to one sector. For example, if you invested in a fund which tracks the FTSE techMARK 100, you would have invested solely in tech companies. If that industry suffered, your investment would go down. On the other hand, actively managed funds have managers who try to buy shares which will outperform an index and try to ride out dips in the market. 

What FTSE indices can I invest in?

There are many different FTSE indices, including: 

• FTSE 100 – the 100 biggest companies listed on the LSE. For example, companies such as BP, Tesco and Royal Mail.
• FTSE 250 – the next 250 biggest companies listed on the LSE. This includes Currys, easyJet and Virgin Money UK, among many others.
• FTSE 350 – combines the companies in the FTSE 100 and FTSE 250. 
• FTSE All Share – around 600 companies on the LSE. 
• FTSE Small Cap – features companies outside the FTSE 350. For example, Halfords Group, Lamprell and Invesco Select UK Equity Ord. 
• FTSE techMARK 100 – features some of the biggest tech companies listed on the LSE, such as BAE Systems and Oxford BioMedica.
• FTSE AIM All Share – a list of the smaller companies on the Alternative Investment Market (AIM).
• FTSE AIM 100 – the 100 biggest companies on the AIM market. For example, Polar Capital Holdings, Boohoo Group and Yellow Cake Ordinary Shares. 

What FTSE tracker funds can I invest in with ii?

With ii, you can invest in a number of FTSE tracker funds. 

Examples of FTSE tracker funds include: 

• Vanguard FTSE Global All Cap Index
• Vanguard FTSE Developed World ex-UK Equity Index
• Vanguard FTSE U.K. Equity Income Index Fund
• HSBC FTSE 250 Index C Acc
• Fidelity Index UK (Class P) Accumulation Fund (tracks the FTSE All-Share index)

FTSE tracker funds are also featured in our Super 60 rated list. 

Please note that the funds featured are examples and should not be taken as personal recommendations.