Index funds in the UK: a beginner's guide to getting started

An index is nothing more than a published list that follows fixed rules. The FTSE 100, for example, is the 100 largest companies listed on the London Stock Exchange, recalculated every quarter, and the S&P 500 is roughly 500 of the largest companies in America.

You cannot invest in a list directly, so an index fund does it for you. It holds every company on the list, in the same proportions, and its value simply moves with the market it copies.

The reason index funds appear in nearly every mainstream beginner resource is the long-run record. The biggest US stock index has averaged roughly 10% a year before inflation over many decades, with other developed markets not far behind.

Treat that number as history rather than a promise, because it includes crashes, long flat stretches and plenty of years far worse than average. The pattern that matters is that patient, boring, list-copying funds have quietly beaten most professional stock-pickers over long periods.

Here is a distinction most UK explainer pages blur. A traditional index fund in the UK is usually an OEIC, short for open-ended investment company, which is priced once a day and bought directly from an investment platform.

An ETF, short for exchange-traded fund, does the same tracking job but is listed on the London Stock Exchange, so it trades all day at a live price, exactly like a share. They follow the same indices and charge similar fees; the real difference is the wrapper around them.

For most beginners the differences are small and the end result is essentially identical, so this is not a decision worth losing sleep over. The funds and figures on this site are the ETF versions, partly because they are available to investors well beyond the UK through any broker with access to the London exchange.

One practical note is that some UK platforms charge different platform fees for funds than for ETFs, and occasionally cap the fee on one but not the other. It is worth a quick look at your platform's pricing page before assuming either is cheaper for you.

If you want the full comparison, including the cases where the old-fashioned fund wrapper still wins, our index funds vs ETFs guide breaks it down properly. The short version is that the index you pick matters far more than the wrapper it arrives in.

The FTSE 100 comes with a counterintuitive twist, because most of its revenue is earned abroad, so it is less of a bet on the UK economy than it looks. It also tends to pay higher dividends, the cash payments companies make to their shareholders, than the American indices, while the S&P 500 is the index behind most of the "the market was up today" headlines.

The appeal of a single global fund is that it never needs rebalancing between countries, because the index adjusts itself as markets grow and shrink.

UK investors debate how much home market to hold, a tendency known as home bias. Some hold only a global fund and let the index decide, while others add a FTSE 100 slice because it is cheap and pays higher dividends. Both are common approaches rather than a right answer and a wrong one, and our guide to choosing between a global fund and the S&P 500 walks through that trade-off properly.

The number to look for is the TER, or total expense ratio: the annual fee the manager deducts quietly inside the fund. You never receive a bill, because the cost is simply reflected in the fund's price.

The cheapest London-listed trackers in our database of more than 100 UCITS ETFs all charge 0.07% a year, which works out to 70p a year on every 1,000 pounds invested. UCITS is the European rulebook that funds sold to everyday investors must follow, which is why the label appears in most European fund names.

All of these are UCITS funds domiciled in Ireland, meaning legally based there, and that detail quietly earns its keep. Under the tax treaty between Ireland and the US, an Irish-domiciled fund pays 15% withholding tax, the tax America deducts from dividends before they leave the country, instead of the default 30% rate that applies where no treaty helps.

That saving happens inside the fund before anything reaches you, and it is one reason Irish-domiciled funds are the standard choice for investors outside America. You can see every fund ranked cheapest first, with live data, in our best UK trackers and best S&P 500 UCITS ETFs tables.

A first purchase breaks down into four steps, and the account type comes before the fund itself.

For retirement money there is also the SIPP, a self-invested personal pension, which adds tax relief on the way in but locks the money away until pension age. ISA rules and allowances change at Budgets, so check the current figures on gov.uk before relying on them.

Once the order fills, you own the whole list. If you are curious what regular investing could build over time, our investment calculator shows what a monthly amount could compound into over the years.

The same fund can behave very differently after tax depending on the account wrapped around it. Inside a stocks and shares ISA or a SIPP, UK tax on capital gains and dividends simply does not apply, so the fund compounds untouched.

In a general investment account, which is the plain unwrapped kind, capital gains tax and dividend tax come into play once your gains or dividends pass the annual allowances. Those allowances have shrunk considerably in recent years.

The exact figures move at Budgets, so rather than print numbers that could be stale by the time you read this, the honest guidance is to check current allowances and rates on gov.uk before making any decision that depends on them.

Your own situation may point somewhere different, and questions like that are exactly what regulated financial advisers exist for.

Index funds have historically rewarded patient investors, and they fall hard sometimes. Both halves of that sentence are true.

The S&P 500 lost roughly half its value in the 2008-09 financial crisis and dropped by a third in a few weeks in 2020, and a FTSE 100 or global fund would not have sheltered you much in either episode. Money in index funds needs to be money that can stay invested through years like those.

Currency adds a wrinkle for UK investors, because most global and US funds hold assets valued in dollars. If the pound strengthens against the dollar, your return measured in pounds shrinks that year even if the index itself did fine. Over decades this tends to wash out, but in any single year it can easily outweigh the market's own move.

Concentration is the quieter risk. A handful of American technology giants dominate both the S&P 500 and the world indices, so "hundreds of companies" overstates the spread a little.

Past performance does not guarantee future returns, and nothing on this page is personal advice. What the record does show is that cheap, boring, list-copying funds have treated patient people well, provided they stayed patient.