How to invest in index funds (2024)

What are index funds?

Index funds are investments like mutual funds and exchange traded funds (ETFs) that passively track the performance of a benchmark index or indices with the aim to mirror performance. For example, if you invest in an ETF that tracks the
, you have exposure to the performance of all the companies that make up the index.

There are four main types of funds in the UK. They differ based on whether they’re listed on a stock exchange (on-exchange) or bought and sold from the fund itself (off-exchange), and whether they try to track the market passively or actively.

On-exchange funds are listed on a regulated stock exchange. This can offer more visibility of other orders on the market, which means more transparency. You can see the price at any time and buy into the fund or exit it quickly, as trades are near instant in liquid markets.

Off-exchange funds don’t trade on a regulated stock exchange – instead, they’re bought and sold over the counter (OTC) from the fund itself. These funds issue and redeem shares directly to and from investors, which often means less liquidity.

The four main fund types are:

On-exchange, passively managed funds like ETFs and exchange traded commodities (ETCs)
On-exchange, actively managed funds like traditional investment trusts, real estate investment trust (REITs) and closed-end mutual funds
Off-exchange, passively managed funds like index tracker funds
Off-exchange, actively managed funds like unit trusts and open-end mutual funds

How to invest in index funds

You can invest in index funds via a wide range of ETFs, REITs, ETCs and investment trusts if you have an account with us. Here are steps on how to buy index funds in the UK:

1. Learn more about index funds

Index funds are one of the most popular ways to get access to a diversified set of assets in one position. Diversification is known for being lower risk, as all your ‘eggs’ aren’t in one ‘basket’. You can diversify across more than just asset classes – you can also invest across an array of geographies, industries and company sizes.

Not only do index funds offer broad exposure, but they’re also considered a lower-cost alternative to investing in several stocks, bonds, etc individually. Note that all investments carry risk, and past performance doesn’t guarantee future results.

2. Identify the index you want to track

Once you’ve decided that you’d like to invest in index funds, it’s time to identify the type of index you’re interested in. Below are some examples of funds and what they track.

You don’t have to invest in a single type of index fund; you can diversify even further. For example, allocating 50% of your investment to bond index funds, and 50% to international index funds.

3. Pick the fund you want to buy

Whichever type of index fund you prefer, we have thousands of markets to choose from, including ETFs, REITs, ETCs and investment trusts.

Exchange traded funds (ETFs)

ETFs track the performance of an underlying asset or group of assets. We have an ETF screener, where you can choose the ETF that’s right for you. Use our screener to filter more than 2000 global ETFs by asset class, country, performance, and more.

You can decide between some of the world’s biggest providers, including:

iShares – the leading ETF provider, with more than $2 trillion in assets under management
Vanguard – offers a variety of ETFs, covering US and international stock and bond markets, as well as
industry-specific sectors
Invesco – offers a wide range of specialist ETFs, covering commodities, forex, fixed income, and equities

Real estate investment trusts (REITs)

REITs work in the same way as mutual funds, with several private investors contributing their own capital to create a single pool of funds. These funds are used to build a portfolio of properties, and the income is almost wholly distributed among its shareholders on a regular basis. We offer more than 40 REITs to choose from, including Nexus and Cromwell.

Exchange traded commodities (ETCs)

ETCs are bought and sold on-exchange; they give you exposure to a basket of commodities in a single position. Commodities are material assets like oil, gas, livestock and wheat. Because ETCs track the underlying price of the commodity, their price will be affected by anything that moves the price of the commodity itself.

Investment trusts

An investment trust is a pool of investor funds used to buy financial assets. If you invest in such a fund, your capital is your own, but you don’t make the investment decisions yourself – the fund manager does. Our trusts give you access to a wide range of markets and are managed by some of the UK’s best fund managers, such as BlackRock and Aberdeen.

4. Open an investment account

Investing in index funds in the UK requires an investment account. You can apply to open an account with us, choosing between a share dealing account and a Smart Portfolio.

Share dealing – invest in ETFs or investment trusts
Smart Portfolio – let experts manage your specially tailored ETF investments

5. Buy shares in the index fund

When you have an open share dealing account and you’ve decided on the fund you want to invest in, follow these steps:

Log in to your account
Search for the fund you’re looking for, eg UCITS FTSE 100
Select your position size
Click on ‘buy’ in the deal ticket

For Smart Portfolios, our experts will tailor-make your investment portfolio. All you need to do is answer a few questions to help us determine the best portfolio for you.

Examples of index funds

We have a wide variety of index funds to choose from, including more than 2000 ETFs as well as a big selection of REITs, ETCs and investment trusts. Some examples are:

Vanguard FTSE 100 UCITS ETF
Invesco QQQ Trust
iShares Core MSCI EAFE ETF
SPDR Dow Jones REIT ETF
WisdomTree Brent Crude Oil ETC
Invesco Physical Gold ETC
WisdomTree Wheat ETC

Advantages and disadvantages of index fund investing

Index funds summed up

Index funds are investments like ETFs, REITs and ETCs that passively track the performance of a benchmark index or indices, enabling access to a diversified set of assets in one position
There are four main types of funds:
- On-exchange, passively managed funds
- On-exchange, actively managed funds
- Off-exchange, passively managed funds
- Off-exchange, actively managed funds
Investing in index funds in the UK requires an investment account. You can apply to open an account with us, choosing between a share dealing account and a Smart Portfolio
Some benefits of investing in index funds are diversification, lower fees, and tax efficiency¹
Disadvantages of investing in index funds include no control over fund composition, not outperforming the market, and lower return potential