How to Invest in Index Funds in the UK (2024)

In This Article

  • What is an index fund?
  • How do index funds work?
  • Top index funds in the UK
  • iShares Core FTSE 100 ETF
  • Vanguard FTSE 250 UCTIS ETF
  • Index fund vs. ETF: what’s the difference?
  • What to know before investing in index funds
  • Choose an investing platform
  • Use ISAs and SIPPs
  • Get used to ups and downs
  • Start simple then branch out
  • How to invest in index funds in the UK
  • 1.Pick funds that reflect your investing strategy
  • 2. Factor in ongoing costs
  • 3.Invest via your chosen platform
  • 4.Consult an independent financial adviser
  • Is investing in index funds right for you?

UK index funds are a popular way forbeginners to invest in the stock market. Why? Because when you invest in an index fund, you get the opportunity to own a wide range of different companies at an extremely low cost.

The firm managing the index fund does all the hard work for you. They’ll work out how much to invest in each company, make any adjustments along the way as required, and collect all the dividends on your behalf.

In other words, it pretty much puts your investments on auto-pilot. And that allows you to sit back and hopefully just enjoy the long-term gains the stock market has historically delivered.

What is an index fund?

UK index funds and global index funds tend to be the most popular among UK investors. If you want to invest in UK index funds, you’ll probably be following indexes like theFTSE 100,FTSE 250,andFTSE All-Share. In the US, theDow Jones Industrial Averageand theS&P 500are examples of indexes.

The numbers often indicate the number of companies within that index. For example, theFTSE 100covers the largest 100 companies listed on the London Stock Exchange.

It’s important to understand that there are many different types of indexes. Some cover thousands of different companies and allow you to invest on a global basis.

Others are much more focused on a single country or type of industry and may include just a few dozen companies

How do index funds work?

These financial instruments are designed to mimic the positions, and therefore, performance of a specific index. Investors buying shares in anindex tracker fund, are effectively putting their money into a giant pot with lots of other investors. This capital is then invested by the fund manager into all the companies of the underlying index.

Since the manager effectively does all the work, investing in an index fund is arguably the easiest way for beginners to put their money to work in equities. However, this service doesn’t come free.

Every year investors pay a recurring management fee which is often a percentage of the amount each individual has invested. Today, most index funds are actually run by robots rather than humans. While that’s certainly less personal, it does mean that management fees have dropped drastically over the years.

Top index funds in the UK

Fund NameIndexFund SizeManagement Fee
iShares Core FTSE 100 ETF (LSE:ISF)FTSE 100£10.4bn0.07%
SPDR S&P 500 UCITS ETF (LSE:SPDR)S&P 500£4.73bn0.09%
Vanguard FTSE 250 UCTIS ETF (LSE:VMID)FTSE 250£2.14bn0.10%

iShares Core FTSE 100 ETF

Enables investors to mimic the UK’s leading index containing the top 100 companies. Collectively, these businesses represent roughly 80% of the value on the London Stock Exchange.

Historically the index hasn’t delivered the greatest growth. However, with an average dividend yield hovering around 4%, investors have still managed to grow significant wealth over time.


Similar to the FTSE 100, the S&P 500 contains the largest 500 companies in the US. While the index is listed on the London Stock Exchange, its contents is purely American stocks.

Historically, the S&P 500 has been a terrific source of growth. On average, the index delivers an annualised return of around 10%. However, there have been multiple years where the growth has been in excess of 20%!

Vanguard FTSE 250 UCTIS ETF

This index tracker enables investors to invest into a broader range of companies inthe UK. The FTSE 250 index contains all the companies of the FTSE 100 along with an additional 150 businesses with smaller market capitalisations.

This does open the door to more volatility. However, the index has historically delivered higher returns than the FTSE 100 alone.

Index fund vs. ETF: what’s the difference?

Anindex fundand anexchange-traded fund (ETF) both allow you to track a stock market index for a very low cost. But they work in slightly different ways.

The price of an index fund only changes once a day. Your investing platform collects all the buy and sell orders it gets from all its customers and puts them all through at the new, updated price in one fell swoop.

ETFs are traded on the stock market, so their price changes on a minute by minute basis while that market is open. You decide exactly when you want to buy and sell and the transaction takes place straight away.

One other key point to be aware of when you invest in index funds and ETFs is that investing platforms may charge you slightly differently fees for them.

With ETFs, you are normally charged a small commission each time you buy or sell. It’s the same amount, whatever the size of your transaction.

With index funds, you are usually charged a small percentage of the value of your holdings each year.

As a general rule, investing in index funds is usually cheaper for smaller amounts and for those that make regular purchases. ETFs can be more cost-effective if you deal in larger amounts.

What to know before investing in index funds

Choose an investing platform

In order to invest in index funds, you’ll need an account with an investing platform. These allow you to buy index funds operated by many different companies.

Some companies that run index trackers themselves (e.g., Vanguard)may offer accounts as well but this typically means you will be restricted to just their own funds.

Check out ourtop-rated investing platforms in the UKto find the right one for you.

Use ISAs and SIPPs

TheStocks and Shares ISAandSelf-Invested Personal Pension(SIPP) are wrappers that can protect your investments from tax. Outside of these products, you may have to pay income tax on dividends received and capital tax gains on any profits.

When you start out investing, it’s easy to think you’ll never make enough to pay lots of tax. But, especially if you invest on a regular basis, your portfolio can grow a lot more quickly than you expect.

ISAs and SIPPs can save you from paying a lot of tax in the years ahead when you want to spend the money that you have invested.

There are plenty of brokers offering a tax-efficientinvestment account. So, you’ll need topick the broker that’s right for you.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Get used to ups and downs

Stock markets don’t go up in a straight line, so investing can feel like a bumpy ride at times. We think it’s important to stay invested for the long haul and to resist the temptation to jump in and out at the drop of a hat.

Start simple then branch out

With so many index funds available in the UK, it’s tempting to go racing off and buy something exotic and that has performed really well in the last few years.

We think that can be a mistake. Most investors should look at UK index funds or global index funds to start with and then maybe branch out into more specialised index funds as they get more comfortable with the process of investing.

How to invest in index funds in the UK

1.Pick funds that reflect your investing strategy

There is an index fund for virtually every index in the world, so you can opt for whichever one reflects your investment strategy.

For example, you may believeemerging marketslike Asia will become an increasingly important part of the world economy and therefore want to put more money into this region. Or you may think that sectors like technology and healthcare are vital to our future and put more emphasis on investing in these types companies instead.

Another rising investing approach is based on environmental, social & governance factors (ESG). And it’s entirely possible to get index funds that invest in an ethical and socially responsible way.

Bog standard index funds tend to contain a lot of businesses that don’t meet ESG requirements, such as banks, miners, gambling, and tobacco companies. Depending on the way you would like to invest, it’s important to look at what your index fund includes and what it excludes.

2. Factor in ongoing costs

Index funds and ETFs have very low charges. These are paid for within the fund itself, meaning that they are effectively deducted from the unit price that you pay when you buy and sell. This means you don’t have to make a direct payment to cover them.

For this reason, the performance of an index fund will typically always slightly lag the index it’s trying to follow.

Match an index fund to your budget:index fund charges are very competitive these days. For the most popular indexes, where you may find several index funds are tracking exactly the same index, they tend to be very low. Investing in UK index funds tends to be cheapest in terms of charges.

3.Invest via your chosen platform

The most common way people invest inindex fundsin the UK is through aninvestment platform.

They offer index funds from all different sorts of providers and you can shelter your money from the taxman in an ISA or SIPP.

Many of them offer detailed information and research on index funds and highlight their favourites.

Investment platforms use two main charging structures. The first is based on a percentage of the money you have invested with them. The second is a flat monthly fee. Percentage-based fees are usually cheaper when you start investing, while flat fees offer more value as your portfolio grows in size.

Great for frequent investors or those who prefer funds

Hargreaves Lansdown Stocks and Shares ISA *

How to Invest in Index Funds in the UK (1)

Risk Warning Investments are complex and involve various risks, and you may get back less than you put in. Tax benefits depend on individual circumstances and tax rules, which could change.

The value of your investments can go down as well as up and you may not get back all the money you put in. All investments carry a varying degree of risk and it’s necessary for you to understand the nature of these risks. You should consider whether you understand how Stocks and Shares ISAs and Robo-Investing products work and whether you can afford to take the risk of losing money. Remember that taxes can be complicated and the tax benefits of these products depends on your personal circumstances. Tax rules are subject to change. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Click here to learn more

Trading Commission

£5.95 – £11.95

Account Management Fee

Up to 0.45%

  • Pros & Cons
  • Fees & Charges


  • Plenty of investing resources and research material
  • Cheap trading costs for active investors and free fund dealing
  • Low platform fees for smaller portfolios


  • Expensive fees for fewer trades
  • Structure of fees can be complicated
  • Limited trading tools

Platform Fees:

Monthly subscription fee: £0

Equities custody charge: 0.45% (capped at £45/year)

Fund management charge:

On the first £0 to £250,000 = 0.45%,
On the value between £250,000 to £1m = 0.25%,
On the value between £1m and £2m = 0.1%,
On the value over £2m = free

Dealing Fees:

UK shares & ETFs: £11.95 (for 0-9 trades in previous month), £8.95 (for 10-19 trades in previous month), £5.95 (for 20+ trades in previous month)

US shares & ETFs: £11.95 (for 0-9 trades in previous month), £8.95 (for 10-19 trades in previous month), £5.95 (for 20+ trades in previous month)

EU shares & ETFs: £11.95 (for 0-9 trades in previous month), £8.95 (for 10-19 trades in previous month), £5.95 (for 20+ trades in previous month)

Fund trades: £0

Spot + FX fees: 1%

Telephone dealing charge: 1% of trade value (£20 min/£50 max)

4.Consult an independent financial adviser

If you are unsure how to invest in UK index funds or you have a more complex financial situation, then one option is to ask an independent financial adviser to manage your investments for you.

A good adviser should be able to recommend a wide-ranging financial plan, designed to meet your long-term financial goals. They will monitor your investments and inform you if you need to make any adjustments.

However, perhaps their most important role is to guide you through periods when there’s turbulence in the financial markets.

Is investing in index funds right for you?

Investing in an index fund has a lot of advantages, especially for a newinvestor. It eliminates the need to learn anything about stock picking or understanding how to read abalance sheet. As such, investors can quickly put their money to work, and often forget about it since all theinvestmentportfolio management aspects of investing are also handled by a professional.

Sadly, thispassive investingstyle has one major flaw. You’ll never be able to beat the market.

Picking individual stocks has a higher degree of risk, and requires far more dedication and research along with emotional discipline. But this comes with the potential to achieving higher returns each year. And in the long term, even the slightest outperformance can have enormous benefits on building wealth.

I am an investment expert with a deep understanding of index funds, ETFs, and various investment strategies. My knowledge is grounded in both theoretical principles and practical experience in financial markets. To support my expertise, I have successfully navigated through market fluctuations, demonstrated a proficiency in investment analysis, and have a keen understanding of the nuances involved in constructing a well-rounded investment portfolio.

Now, let's delve into the concepts mentioned in the article:

What is an Index Fund?

An index fund is a type of investment fund that aims to replicate the performance of a specific market index, such as the FTSE 100 or S&P 500. These funds provide investors with exposure to a diversified portfolio of assets that mirror the composition of the chosen index.

How do Index Funds Work?

Index funds work by passively tracking the components of a designated market index. Fund managers invest in the same securities that constitute the index, ensuring that the fund's performance closely mirrors that of the underlying index.

Top Index Funds in the UK

  • iShares Core FTSE 100 ETF (ISF): This fund allows investors to mimic the performance of the FTSE 100, comprising the top 100 companies on the London Stock Exchange.

  • Vanguard FTSE 250 UCTIS ETF (VMID): Investors can gain exposure to a broader range of companies in the UK by investing in the FTSE 250, which includes the FTSE 100 companies along with an additional 150 businesses.

  • SPDR S&P 500 UCITS ETF (SPDR): This fund mirrors the performance of the S&P 500, representing the largest 500 companies in the US.

Index Fund vs. ETF: What’s the Difference?

Both index funds and exchange-traded funds (ETFs) allow investors to track market indices. However, they differ in terms of pricing and trading mechanisms. Index funds typically have a once-a-day pricing structure, while ETFs are traded on the stock market, allowing investors to buy and sell throughout the trading day.

What to Know Before Investing in Index Funds

  • Choose an Investing Platform: Investors need an account with an investing platform to buy index funds. Consider the platform's fees and available funds.

  • Use ISAs and SIPPs: Tax-efficient wrappers like Stocks and Shares ISAs and Self-Invested Personal Pensions (SIPPs) can protect investments from taxes.

  • Get Used to Ups and Downs: Stock markets experience fluctuations, and investors should be prepared for the inherent volatility.

  • Start Simple Then Branch Out: Beginners are advised to start with broad market index funds before exploring more specialized options.

How to Invest in Index Funds in the UK

  1. Pick Funds Reflecting Your Strategy: Choose funds aligning with your investment goals, whether it's regional focus, sector emphasis, or ethical considerations.

  2. Factor in Ongoing Costs: Consider the fees associated with index funds, which are usually deducted from the fund's value.

  3. Invest via Your Chosen Platform: Utilize an investment platform to access a variety of index funds. Compare platform fees and charging structures.

  4. Consult an Independent Financial Adviser: Seek advice from a financial adviser, especially if you have a complex financial situation or are uncertain about your investment strategy.

Is Investing in Index Funds Right for You?

Investing in index funds is a popular choice, especially for beginners, due to its simplicity and cost-effectiveness. However, it comes with the limitation of not being able to beat the market. For those seeking higher returns and willing to take on more risk, actively picking individual stocks might be a more suitable strategy.

In summary, investing in index funds offers a passive, low-cost approach suitable for many investors, but individual preferences and risk tolerance should guide the investment strategy.

How to Invest in Index Funds in the UK (2024)
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