Five cheap and simple funds for income

If you don’t trust fund managers to pick the best income shares, one of these ‘passive’ funds may be a better bet, says Laura Suter

Investors who want lowcost options for income in retirement can use “passive” funds. Unlike the actively managed investment trusts featured in the main article (left), these funds simply track an index or market, such as the FTSE 100 index of leading British companies.

They differ from active funds in that they do not make calls on the companies they think will outperform, and instead buy the whole market. This allows them to charge less.

Traditional passive or “tracker” funds were structured as unit trusts (or the very similar “Oeics”) and were bought from a fund company, albeit often via an intermediary. A newer kind of passive fund is quoted on the stock market, so you buy and sell via a stockbroker. The price of these “exchange-traded funds” (ETFs) can therefore change throughout the day as buying or selling occurs.

They differ from investment trusts, which are also listed funds, in that shares can be created or cancelled at will, meaning that discounts and premiums to the funds’ asset value do not normally occur.

However, not all ETFs will be suitable as there are two different ways in which they can be structured.

The first, and more desirable for most investors, uses a system known as “physical replication”. This means that the fund actually holds the assets in question, such as shares in the companies in the FTSE 100 index or gold held in a secure vault.

The second method is “synthetic” replication, where performance is delivered by the ETF issuer agreeing to a more complicated “derivative” deal with another party. This other party is then contracted to provide the return of the underlying assets. There is far less transparency with synthetic ETFs and you may be exposed to the risk of default by the other party.

We asked Jason Hollands of Tilney Bestinvest, the broker and adviser, and Oliver Smith, a portfolio manager at IG, the investment platform, to tip some ETFs for income. All the funds below pay income quarterly. This ETF excludes stocks that do not pay a dividend. Compared with the global market as a whole it has a smaller proportion of its money in technology stocks and North America.

It has a 26pc allocation to financial shares, which should provide an opportunity if interest rates start to rise globally. It yields 3.1pc and has an ongoing charge of 0.29pc a year.

(A “Ucits” fund is one that conforms to certain European standards.)

This ETF offers exposure to the 50 highest-yielding companies from the FTSE 350 index (the largest 350 companies in the UK). The fund yields

This is a more diversified option than the above fund. It tracks the FTSE 100 index, with a 3.8pc yield and 0.07pc annual costs. This fund tracks an index of 100 high-yielding companies with long track records of paying dividends. It currently yields 3.2pc with an ongoing charge of 0.45pc a year. This tracks an index of sterlingdenominated bonds issued by companies that are highly rated or “investment-grade”. Yielding 3.4pc with an ongoing charge of 0.2pc a year.