This updated list of low-cost index funds and Exchange Trade Funds (ETFs) will help you to find the cheapest index trackers available in the UK.

Pick from these funds to build a diversified portfolio that – as part of a passive investing strategy – will enable you to achieve your investing goals.

Keeping charges low is a core tenet of wise investing, and so our selections are largely determined by cost and value. Every pound you save in fees is a pound that instead snowballs in your portfolio over the years.

Our piece on management fees explains how even small savings will add up to a big difference.

The growing recognition of the importance of investment fees has hugely boosted the popularity of low-cost index funds and ETFs over the past 20 years.

We too believe that these fund types are the best value investment vehicles on offer in the UK, and the right choice for passive investors.

Low-cost index funds UK – the Total Cost of Ownership

Our cheapest tracker fund UK list is divvied up into the key sub-asset classes you may wish to invest in.

The picks per asset class are ranked by their Total Cost of Ownership (TCO).

This TCO is the sum of a fund’s transaction costs and its Ongoing Charge Figure (OCF).

Many outlets only highlight a fund’s OCF (or Total Expense Ratio). But that misses out a significant chunk of cost that is captured by the less well-known transaction cost figure.

Transaction costs are the fees and taxes that all investment funds inevitably incur when trading their underlying assets.

We think it’s important to include transaction costs when considering your shortlist because such charges can be of similar size to the OCF in some sub-asset classes.

Note: fund costs are a complex and confusing area. We’ve added a few more notes about fees after the main list below.

Note II: we’ve also included the cheapest ESG option for each asset class.

Alright, let’s go hunting for bargains!

Global equity – developed world and emerging markets (All-World)

Cheapest

• Amundi Prime All Country World ETF (PACW) TCO 0.07% (OCF 0.07%, Transaction 0%)

Next best

• SPDR MSCI ACWI ETF (ACWI) TCO 0.12% (OCF 0.12%, Transaction 0%)

• HSBC FTSE All-World Index Fund C (GB00BMJJJF91) TCO 0.15% (OCF 0.13%, Transaction 0.02%)

• Invesco FTSE All-World ETF (FWRG) TCO 0.17% (OCF 0.15%, Transaction 0.02%)

• Scalable MSCI AC World Xtrackers ETF (SCXW) TCO 0.18% (OCF 0.17%, Transaction 0.01%)

• SPDR MSCI ACWI IMI ETF (IMID) TCO 0.18% (OCF 0.17%, Transaction 0.01%)

• SPDR MSCI ACWI Climate Paris Aligned ETF (SAPA) TCO 0.22% (OCF 0.2%, Transaction 0.02%)

World equity – developed world only

Cheapest

• Amundi Prime Global ETF (MWOZ) TCO 0.05% (OCF 0.05%, Transaction 0%)

Next best

• UBS Core MSCI World ETF (WRDA) TCO 0.06% (OCF 0.06%, Transaction 0%)

• Franklin FTSE Developed World ETF (DWLD) TCO 0.11% (OCF 0.09%, Transaction 0.02%)

• iShares Developed World Index Fund D (IE00BD0NCL49) TCO 0.12% (OCF 0.12%, Transaction 0%)

• iShares Developed World Fossil Fuel Screened Index Fund (GB00BFK3MT61) TCO 0.12% (OCF 0.11%, Transaction 0.01%)

World ex-US equity

Cheapest

• iShares MSCI World ex-USA ETF (XUSE) TCO 0.15% (OCF 0.15%, Transaction 0%)

Next best

• Amundi MSCI World ex-USA ETF (WEXU) TCO 0.16% (OCF 0.15%, Transaction 0.01%)

• Xtrackers MSCI World ex-USA ETF (XMWX) TCO 0.17% (OCF 0.15%, Transaction 0.02%)

World ex-UK equity

Cheapest

• Vanguard FTSE Dev World ex-UK Equity Index Fund (GB00B59G4Q73) TCO 0.16% (OCF 0.14%, Transaction 0.02%)

Next best

• L&G International Index Trust I Fund (GB00B2Q6HW61) TCO 0.16% (OCF 0.13%, Transaction 0.03%)

• Aviva Investors International Index Tracking SC2 Fund (GB00B2NRNX53) TCO 0.25% (OCF 0.25%, Transaction 0%)

You can also pick ‘n’ mix using individual US, Europe ex-UK, Japan, and Pacific ex-Japan trackers.

World income equity

Cheapest

• Xtrackers MSCI World High Dividend Yield ESG ETF (XZDW) TCO 0.29% (OCF 0.25%, Transaction 0.04%)

Next best

• Vanguard FTSE All-World High Dividend Yield ETF (VHYG) TCO 0.32% (OCF 0.29%, Transaction 0.03%)

• iShares World Equity High Income Active ETF (WINC) TCO 0.35% (OCF 0.35%, Transaction 0%)

• UBS S&P Dividend Aristocrats ESG Elite ETF (UBUM) TCO 0.35% (OCF 0.3%, Transaction 0.05%)

• Franklin Global Quality Dividend ETF (FLXX) TCO 0.36% (OCF 0.3%, Transaction 0.06%)

• Vanguard Global Equity Income Fund (GB00BZ82ZW98) TCO 0.67% (OCF 0.48%, Transaction 0.19%)

The Vanguard fund is active but gives you a non-ETF option.

World small cap equity

Cheapest

• UBS MSCI World Small Cap Socially Responsible ETF (WSCR) TCO 0.24% (OCF 0.23%, Transaction 0.01%)

Next best

• HSBC MSCI World Small Cap Screened ETF (HWSS) TCO 0.27% (OCF 0.25%, Transaction 0.02%)

• iShares MSCI World Small Cap ETF (WLDS) TCO 0.36% (OCF 0.35%, Transaction 0.01%)

• Vanguard Global Small-Cap Index Fund (IE00B3X1NT05) TCO 0.38% (OCF 0.29%, Transaction 0.09%)

• Avantis Global Small Cap Value ETF (AVSG) TCO 0.48% (OCF 0.39%, Transaction 0.09%)

The Avantis ETF is specifically small cap value, not just small cap.

US large cap equity

Cheapest

• SPDR S&P 500 ETF (SPXL) TCO 0.03% (OCF 0.03%, Transaction 0%)

• Amundi MSCI USA ETF (MSCU) TCO 0.03% (OCF 0.03%, Transaction 0%)

• UBS Core S&P 500 ETF (S5UA) TCO 0.03% (OCF 0.03%, Transaction 0%)

Next best

• iShares US Equity Index Fund D (GB00B5VRGY09) TCO 0.06% (OCF 0.05%, Transaction 0%)

• HSBC American Index Fund C (GB00B80QG615) TCO 0.06% (OCF 0.06%, Transaction 0%)

• Fidelity Index US Fund P (GB00BJS8SH10) TCO 0.06% (OCF 0.06%, Transaction 0%)

• Amundi S&P 500 Climate Paris Aligned ETF (CLMT) TCO 0.08% (OCF 0.07%, Transaction 0.01%)

The tax treatment of US equities gives synthetic ETFs a tax advantage over physical funds. Find out more in our Best S&P500 ETFs and index funds article.

UK large cap equity

Cheapest

• iShares UK Equity Index Fund D (GB00B7C44X99) TCO 0.05% (OCF 0.05%, Transaction 0%)

Next best

• abrdn UK All Share Tracker Fund B (GB00B76B9Y24) TCO 0.06% (OCF 0.05%, Transaction 0.01%)

• Fidelity Index UK Fund P (GB00BJS8SF95) TCO 0.09% (OCF 0.06%, Transaction 0.03%)

• HSBC FTSE All Share Index Fund Institutional (GB0030334345) TCO 0.1% (OCF 0.03%, Transaction 0.07%)

• Vanguard FTSE UK All Share Index Unit Trust (GB00B3X7QG63) TCO 0.11% (OCF 0.06%, Transaction 0.05%)

• L&G UK Equity ETF (LGUK) TCO 0.13% (OCF 0.05%, Transaction 0.8%)

• iShares UK Equity ESG Screened and Optimised Index Fund D (GB00BN08ZV03) TCO 0.19% (OCF 0.05%, Transaction 0.14%)

Emerging markets equity

Cheapest

• Amundi MSCI Emerging Markets ETF (LEMA) TCO 0.14% (OCF 0.14%, Transaction 0%)

Next best

• Franklin FTSE Emerging Markets ETF (EMER) TCO 0.15% (OCF 0.11%, Transaction 0.04%))

• HSBC MSCI Emerging Markets ETF (HMEC) TCO 0.17% (OCF 0.15%, Transaction 0.02%)

• iShares Emerging Markets Index Fund D (GB00B84DY642) TCO 0.19% (OCF 0.19%, Transaction 0%)

• iShares Emerging Markets Equity ESG Screened and Optimised Index Fund D (GB00BN090307) TCO 0.21% (OCF 0.19%, Transaction 0.02%)

Property – global

Cheapest

• Xtrackers Developed Green Real Estate ESG ETF (XDRE) TCO 0.23% (OCF 0.18%, Transaction 0.05%)

Next best

• L&G Global Real Estate Dividend Index Fund I (GB00BYW7CN38) TCO 0.25% (OCF 0.21%, Transaction 0.04%)

• HSBC ETF FTSE EPRA/NAREIT Developed ETF (HPRS) TCO 0.26% (OCF 0.24%, Transaction 0.02%)

• VanEck Global Real Estate ETF (TREG) TCO 0.26% (OCF 0.25%, Transaction 0.01%)

• Amundi ETF FTSE EPRA/NAREIT Global ETF (EPRA) TCO 0.27% (OCF 0.24%, Transaction 0.03%)

Multi-factor – global

Cheapest

• JPMorgan Global Equity Multi-Factor ETF (JPLG) TCO 0.21% (OCF 0.19%, Transaction 0.02%)

Next best

• Invesco Global ex UK Enhanced Index Fund Z (GB00BZ8GWT74) TCO 0.28% (OCF 0.23%, Transaction 0.05%)

• iShares STOXX World Equity Multifactor ETF (FSWD) TCO 0.37% (OCF 0.3%, Transaction 0.07%)

• Invesco Quantitative Strategies ESG Global Equity Multi-Factor ETF (IQSA) TCO 0.39% (OCF 0.3%, Transaction 0.09%)

• HSBC Multi-Factor Worldwide Equity ETF (HWWA) TCO 0.39% (OCF 0.25%, Transaction 0.14%)

Factor investing strays into active management territory. You are hoping your chosen subset of the market will outperform. Select funds underpinned by sound financial theory, a verifiable set of rules, and a commitment to low costs.

Regional factor ETFs are available. But we’ve stuck to global multi-factor low-cost index funds for broad diversification.

Money market – GBP

Cheapest

• Lyxor Smart Overnight Return ETF (CSH2) TCO 0.1% (OCF 0.1%, Transaction 0%)

• Royal London Short Term Money Market fund (GB00B8XYYQ86) TCO 0.1% (OCF 0.1%, Transaction 0%)

• Xtrackers GBP Overnight Rate Swap ETF (XSTR) TCO 0.1% (OCF 0.1%, Transaction 0%)

• UBS GBP Overnight Rate SF ETF (GBPO) TCO 0.1% (OCF 0.1%, Transaction 0%)

Money market funds are actively managed.

UK Government bonds – intermediate

Cheapest

• Amundi UK Government Bond ETF (GILS) TCO 0.06% (OCF 0.05%, Transaction 0.01%)

• Invesco UK Gilts ETF (GLTA) TCO 0.06% (OCF 0.06%, Transaction 0%)

Next best

• iShares Core UK Gilts ETF (IGLT) TCO 0.09% (OCF 0.07%, Transaction 0.02%)

• Fidelity Index UK Gilt Fund P (GB00BMQ57G79) TCO 0.1% (OCF 0.1%, Transaction 0%)

• iShares GiltTrak Index Fund (IE00BD0NC250) TCO 0.1% (OCF 0.1%, Transaction 0%)

UK Government bonds – long

Cheapest

• iShares Over 15 Years Gilts Index Fund (GB00BF338G29) TCO 0.11% (OCF 0.11%, Transaction 0%)

Next best

• Vanguard UK Long-Duration Gilt Index Fund (GB00B4M89245) TCO 0.12% (OCF 0.12%, Transaction 0%)

• SPDR Bloomberg Barclays 15+ Year Gilt ETF (GLTL) TCO 0.15% (OCF 0.15%, Transaction 0%)

UK Government bonds – short

Cheapest

• L&G UK Gilt 0-5 Year ETF (UKG5) TCO 0.07% (OCF 0.06%, Transaction 0.01%)

• Invesco UK Gilt 1-5 Year ETF (GLT5) TCO 0.07% (OCF 0.06%, Transaction 0.01%)

• Amundi UK Government Bond 0-5Y ETF (GIL5) TCO 0.07% (OCF 0.05%, Transaction 0.02%)

Next best

• Goldman Sachs Access UK Gilts 1-10 Years ETF (GBPG) TCO 0.09% (OCF 0.07%, Transaction 0.02%)

• iShares Up to 10 Years Gilts Index Fund (GB00BN091C65) TCO 0.14% (OCF 0.13%, Transaction 0.01%)

The 1-10 years funds have a longer bond duration than the other short-dated funds in this section, but are significantly shorter duration than standard UK all-stocks or intermediate funds.

UK Government bonds – index-linked

Cheapest

• Amundi UK Government Inflation-Linked Bond ETF (GILI) TCO 0.07% (OCF 0.07%, Transaction 0%)

Next best

• L&G All Stocks Index Linked Gilt Index Trust C (GB00BG0QNY41) TCO 0.08% (OCF 0.08%, Transaction 0%)

• iShares Up to 10 Years Index Linked Gilt Index Fund D (GB00BN091H11) TCO 0.13% (OCF 0.13%, Transaction 0%)

UK index-linked funds may not be suitable for your portfolio due to embedded real interest risk. In our Slow and Steady portfolio we’ve switched to a short duration global index-linked fund, hedged to GBP. For those, see below.

The iShares Up to 10 Years Index Linked Gilt Index Fund is relatively new. But we think it’s the best inflation-hedge from the selection above as it’s the shortest duration GBP linker fund available.

Global inflation-linked bonds hedged to £ – short

Cheapest

• Abrdn Short Dated Global Inflation-Linked Bond Tracker Fund B (GB00BGMK1733) TCO 0.14% (OCF 0.14%, Transaction 0%)

Next best

• Amundi Global Inflation-Linked 1-10Y Bond ETF (GISG) TCO 0.2% (OCF 0.2%, Transaction 0%)

• Royal London Short Duration Global Index Linked Fund M (GB00BD050F05) TCO 0.27% (OCF 0.27%, Transaction 0%)

The Royal London fund is actively managed.

Global government bonds hedged to £

Cheapest

• Amundi Prime Global Government Bond ETF (PRHG) TCO 0.09% (OCF 0.07%, Transaction 0.02%)

Next best

• Abrdn Global Government Bond Tracker Fund B (GB00BK80KQ76) TCO 0.13% (OCF 0.13%, Transaction 0%)

• iShares Broad Global Government Bond ETF (IGBS) TCO 0.13% (OCF 0.13%, Transaction 0%)

• Amundi Index JP Morgan GBI Global Govies ETF (GOVG) TCO 0.16% (OCF 0.15%, Transaction 0.01%)

• iShares Overseas Government Bond Index Fund D (GB00BN091P94) TCO 0.18% (OCF 0.13%, Transaction 0.05%)

Gold

Cheapest

• Amundi Physical Gold ETC (GLDA) TCO 0.12% (OCF 0.12%, Transaction 0%)

• Invesco Physical Gold A ETC (SGLP) TCO 0.12% (OCF 0.12%, Transaction 0%)

• WisdomTree Core Physical Gold ETC (GLDW) TCO 0.12% (OCF 0.12%, Transaction 0%)

• Xtrackers IE Physical Gold ETC (XGDU) TCO 0.12% (OCF 0.12%, Transaction 0%)

• iShares Physical Gold ETC (SGLN) TCO 0.12% (OCF 0.12%, Transaction 0%)

Gold trackers are Exchange Traded Commodities (ETCs). These are functionally index trackers like ETFs, only they’re focused on commodities investing.

Broad commodities

Cheapest

• Xtrackers Bloomberg Commodity Swap ETF (XCMC) TCO 0.19% (OCF 0.19%, Transaction 0%)

Next best

• iShares Diversified Commodity Swap ETF (COMM) TCO 0.29% (OCF 0.19%, Transaction 0.1%)

• WisdomTree Broad Commodities ETF (COMX) TCO 0.29% (OCF 0.29%, Transaction 0%)

• UBS CMCI Composite SF ETF (UC15) TCO 0.34% (OCF 0.34%, Transaction 0%)

• Invesco Bloomberg Commodity ETF (CMOP) TCO 0.34% (OCF 0.19%, Transaction 0.15%)

• L&G Longer Dated All Commodities ETF (CMFP) TCO 0.73% (OCF 0.3%, Transaction 0.43%)

We’ve written a much more nuanced take on choosing a commodities ETF. Sometimes cheapest isn’t best.

Using our cheapest index funds UK list

You can precisely identify the low-cost index funds you want to research via the ISIN codes or ETF tickers shown in our list in brackets. (We’ve previously explained how fund names work.)

We’ve given the code for the GBP-priced accumulation fund flavour where available. Income distributing versions are also usually offered. Make sure you understand the ins and outs of accumulation vs income funds.

Also note:

• We’ve included an Environmental, Social, and Governance (ESG) index tracker option for each sub asset-class where available.
• Actively-managed funds are featured when low-cost index funds are not available. Active funds are noted in the relevant sections.
• We don’t show platform-exclusive index trackers. They’re generally not a good deal overall.

Cheap index trackers and costs – extra detail

The bid-offer spread is an additional cost you may incur that isn’t captured by the TCO figures quoted above.

This charge shouldn’t be significant for most passive investors anyway1 but you can gauge it by using the estimated spread published by Hargreaves Lansdown on its fund pages.

The final significant investing cost you’ll need to pay are broker fees. We track those on our broker comparison table.

Watch out for FX fees charged by brokers on certain funds. This is a stealth cost that you can avoid.

Some providers of synthetic ETFs publish a ‘swap fee’ on top of the TER. Just add the swap fee to the TER to get the Ongoing Charge Figure. This is how we’ve treated swap fees in the listing above.

It’s worth knowing that a fund’s transaction costs can fluctuate quite a lot from period to period, especially if there’s excessive turnover in the fund’s index. So don’t feel like you need to instantly switch if your fund’s transaction costs suddenly spike. Keep your fund and its main rivals under review for up to a year before coming to any definitive conclusion about its competitiveness.

Some index trackers register negative transaction costs, but I’ve disregarded that from the TCO calculations above. That’s because negative transaction costs amount to an accounting technique that’s not sustainable over time.

Low-cost index funds UK – fees you can ignore

Don’t pay any attention to a fund’s Annual Management Charge (AMC). The AMC is an old-fashioned fee metric that excludes important fund costs. This is why a fund’s AMC is typically lower than its OCF or TER.

Do not add the AMC to the OCF or TER.

The OCF and TER are interchangeable, however, so choose one of those costs (the highest) and add it to the fund’s transaction cost to calculate its TCO.

Treat negative transaction costs as zero.

Ignore entry and exit charges for index trackers where you see them mentioned in fund literature such as Key Investor Information Documents. Such fees do not apply to ordinary investors like you and me. They are levied on institutional participants dealing directly with the fund provider.

The same thing goes if you see an eye-watering minimum purchase figure (such as £100,000) to buy into a fund.

Be guided by your broker’s minimum purchase amount.

Final thoughts on low-cost index funds and ETFs

There’s often little to distinguish index trackers that are closely matched in price. However we’ve written a few pieces to help you resolve tie-breaker situations:

• Comparing funds
• Why tracking difference is important
• How to choose index trackers
• Best global tracker funds
• How to choose a bond fund
• Best bond funds
• Choosing a commodities ETF
• Best S&P 500 ETFs and index funds

If you’re looking for the cheapest place to buy and hold your low-cost index funds then also take a gander at our broker comparison table.

Our article on designing your own asset allocation will help you to construct your portfolio. If you want a shortcut, you could do a lot worse than check out our best multi-asset fund picks for an instant portfolio solution.

We periodically update this list of low-cost funds. Quoted TCOs may date as fund groups fight their turf wars by undercutting each other (hurrah!) but this article should still be an excellent starting point for your research.

If anyone comes across any better index tracker options then please let us know in the comments below.

Take it steady,

The Accumulator

Note: early comments below may refer to an older collection of low-cost index trackers. Scroll down for the latest thoughts.

1. Wide spreads are more typically an issue with individual company shares. [↩]

What caught my eye this week.

I read hundreds of investing-related articles to compile these Weekend Reading links each week. Far more than when I was just doing my own active investing research.

I enjoy it. But I also wonder how much it skews my perception of the markets and investor behaviour.

Hot takes and weird observations are what spreads and commands attention, after all. Nobody is very motivated to write “same old, same old” – except of course my staunchly passive co-blogger.

And reading all this kerfuffle every week has led me to wonder whether the stock market really has become as ‘degenerate’ as the Millennials commentators say?

Or is that just how it appears from inside this snow globe of opinion?

Funding the fanaticism

Some things have clearly changed a lot over the past decade. Mostly driven I’d suggest by free share trading and vast social media platforms, but also by the influence of crypto – especially the mega-bagging returns from Bitcoin and Ethereum that have underwritten this shift towards investo-gambling.

How many twenty-somethings would be YOLO-ing their life savings if Bitcoin had fallen back to $10 and stayed there?

Exactly.

It didn’t though – it minted millionaires – and the lingo of the resultant crypto movement has leaked into how punters wielding free share dealing apps talk about stocks, and how at least some trade them.

There’s lots of reports with data showing that retail traders are an ever-bigger driver of stock volatility. But are these just the same people who were punting on tinpot resource stocks 25 years ago, and hyping their trades on ADVFN and The Motley Fool?

Or is it all a sign of some deeper structural malaise?

Asymmetric investing warfare

Over the past few years a narrative has developed that explains this apparent embrace of reckless speculation not through the technological drivers I see – zero-commission apps, mass-broadcast platforms, and blockchain – but through an almost Marxist lens.

In a compelling piece this week, a crypto-focused blogger called Jez presented what he dubs ‘hypergambling’ as a logical response to asset inequality:

the core issue here is the cost of owning a house, and the expected timeline on an average salary.

with this core social contract broken, people look for shortcuts. crypto, memestocks, and the rise of option and leverage trading are examples of the public’s increasing desire for volatility and asymmetric upside when linear can’t buy a house.

It’s interesting that my fellow curator-in-arms Tadas Viskanta also believes these forces are real:

For a long time it seemed the arc of financial markets was bending towards the interests of the individual investor. One could easy argue that arc has shot off in another more degenerate direction.

But then Tadas reads even more from the opinion hosepipe than I do. Pehaps he’s suffering from the same narrative overload?

Either way, there’s also the bigger, bigger picture.

If you’re someone like me who believes the current US administration is wildly overstepping multiple lines of legality, cultural norms, and decency, then it becomes even easier to fear the wider world “turning and turning on the widening gyre”, as Yeats once put it:

“Things fall apart, the centre cannot hold. Mere anarchy is loosed upon the world.”

Why play by the old rules when even the ostensible leader of the free world is trying to bend the data to his will?

As the longstanding economics blogger at Bonddad put it this week:

Now we have the additional wrench in the works in the form of a mafia-style blowout being the operative behavior from the US Administration.

If sowing chaos were a winning economic move, banana republics everywhere would be wealthy.

There’s a good reason why they’re not, and that’s because chaos and corruption make it impossible for producers to foresee the results of their economic actions.

With the first family having their hands all over crypto even as legislation is rewritten by their guys at the top, the stage is arguably set for what Bloomberg’s Joe Weisenthal has dubbed ‘The Golden Age of Grift’ [paywalled link].

Investment manager Cullen Roche quotes official statistics to show a trend that isn’t all in our heads:

Will this chart now go ‘to the moon’ like a heavily-pumped memecoin? Or will the US government stop collecting the data before it gets the chance?

Unfazed while Rome burns

This dispiriting landscape is a long way from the core Monevator message of sensible passive investing.

Heck, even my active investing antics are snoozy and long-term by comparison.

And in contrast to the flashmob stock punters who gather at Reddit’s Wall Street Bets, I’ve stressed you should take what I and anyone else writes with a large dose of salt.

Moreover there’s plenty of evidence that ever more people are investing in index funds.

Fund giant Vanguard has produced data too that shows very few of its customers are trading in and out of their funds based on the latest news headlines, or other tumult in the markets.

So which way are we really going?

Perhaps like everything else these days we’re polarising into two camps. Shut-out degenerate gamblers looking for a quick leg-up into money-baller society on the one hand, and steady Eddie millionaires next door – eventually – plodding towards financial freedom on the traditional path on the other?

Or perhaps it’s all just light and mirrors and it’s the same as it ever was?

Tell us what you think in the comments, and have a great weekend!

[continue reading…]

New contributor Frugalist explains how stoozing enables him to supercharge his savings. And if those words make no sense to you then luckily we’ve got 2,000 more where they came from…

Never get into debt and never gamble. Those were the only two pieces of financial advice my mother ever gave me.

Unfortunately by my late teens I’d figured out how to profit from both. It caused no end of horror when the logo-covered post began to arrive.

Today I’m much closer to that maternal ideal though.

I save, I invest, and I never miss my debt payments.

Oh yes – I’m still in debt.

However I’ve got debt on my terms now. I pay no interest, and rather than gambling with my borrowings I’m putting the proceeds into a sure thing – savings that pay me interest.

This is called ‘stoozing’ and no, I didn’t invent that term while smoking something funny.

Instead I must give credit to the stoozing pioneers in the 2000s. Some of you may even be grey enough to remember discussion board user Stooz, after whom the practice is named. (The Investor is ancient enough to confirm this).

In those halcyon early days, I was too worried about school and finishing The Elder Scrolls IV: Oblivion.

But I caught on eventually – and to this day I remain an ardent credit card stoozer.

What is stoozing?

In essence, stoozing means borrowing money at 0%, then stashing it somewhere else that pays more than 0% as interest.

You can then sit back and enjoy the fruits of your arbitrage:

• You borrow £50,000 at 0% and stick it in an account paying 5% interest
• That’s £2,500 in your pocket every year

I can already hear the complaints!

What about your credit file? What about tax? Where is this magical 0% credit card with a £50,000 limit?

Okay, okay – it isn’t quite that easy.

But it is completely true that I’ve meaningfully supplemented my own income with relatively little effort through stoozing this way.

Tools of the stooze

There are three kinds of credit cards that make stoozing a reality. 

First is a 0% spending card. With these, you spend on your 0% card as usual until you reach your credit limit, making minimum repayments as you go to avoid paying interest. You put the cash that would have gone on spending into a savings account instead. 

Second is a money transfer card, where you move money from a credit card into your bank account for a one-off fee.

Third is a balance transfer card. Here you take debt from one credit card and shift it onto another – usually for a small transfer fee. Balance transfer cards are great for rolling over the debt that you’ve already built up.

Wealth warning Remember, I’m moving this debt into cash savings, so net-net I’m not actually going into debt. I can always repay my card balances with my accumulated savings, hence the risk of responsible stoozing is very low. However if you don’t trust yourself to be completely disciplined then don’t go near stoozing with a bargepole.

How to get started with stoozing

The process is best illustrated with an example.

Let’s imagine that Jane gets a 0% spending card with a credit limit of £11,000. After a year of using this card for normal spending – and saving the cash she’d otherwise have spent – she has a balance of £10,000 on the card and £10,000 in her savings account. 

Jane then gets another card. This time it’s a 0% money transfer card. With this she can transfer £12,000 to her bank account with a 2% fee (£240).

At this point, Jane has £22,000 of cash savings, and is down £240 from the transfer.

But over the coming year, she makes 4.5% in her savings account. Like this Jane earns herself £990, leaving a £750 profit for the year. 

Even if Jane earns an above-average £40,000, this is more than a week’s net wages.

When her credit cards start to come towards the expiration date of their 0% rate period, Jane can get a balance transfer card, to move her debts to the new card. This keeps the game going.

At the more extreme end, I’ve even stoozed with a personal loan, when borrowing rates dipped below 3%.

Fees and taxes are a drag

Typically, you pay lower pro-rated fees on shorter deals. Below I’ve set out how this affects the annual profit, based on some of the currently available deals on the market.

I’ve assumed a £10,000 balance transfer with the cash saved in a 4.5% savings account, which earns £450 annual income.

Transfer Fee	Months	Annualised Fee	Annual Profit
2.99%	34	1.06%	£344
1.49%	22	0.81%	£369
No fee	14	0%	£450

You can see that short-term cards have the most profit potential, in exchange for the extra hassle of shorter timescales.

The long-term cards are still worth a look though. With these you can avoid repeated credit checks, reduce the hassle involved with transferring balances, and keep that stoozed capital working for you for a longer period. 

Either way, a single card could net you around £1,000 profit over three years – or more if you’re happy to renew every 14 months.

Don’t forget about tax

You’ll probably pay tax on your savings interest:

• As a 20% basic-rate taxpayer you can earn £1,000 tax-free from savings
• As a higher-rate 40% taxpayer your allowance falls to £500
• At 45% you are considered so rich that you get no allowance

Here’s what each bracket of taxpayer would earn on three different savings balances at 4.5% after income tax is deducted, taking into account the personal savings allowance:

Savings	0%	20%  (£1,000 allowance)	40% (£500 allowance)	45% (No allowance)
£10,000	£450	£450	£450	£248
£25,000	£1,125	£1,100	£875	£619
£50,000	£2,250	£2,000	£1,550	£1,238

Even as a higher-rate taxpayer, a £10,000 savings pot at current easy access rates won’t attract tax. So just dipping your toe into the stoozing waters may be appealing.

But to push the envelope further you’ll need to explore tax-free savings products.

My preference is Premium Bonds. But also consider gilts or even a standard cash ISA (assuming you won’t otherwise be filling your stocks and shares ISA with, um, stocks and shares).

Stoozing and emergency funds

Here’s another angle to think about for anyone chasing financial independence.

Some gurus argue against emergency funds if you’re striving for FIRE, on the basis that keeping any capital in cash creates too great a drag on total investment growth.

For instance, if you start your FIRE journey by saving up a £40,000 emergency fund in a cash account that only matches inflation – and only after that’s in place go on to take another 20 years accumulating your investments – then if those investments earn a 7% annual real return, you’ve missed out on £115,000 of growth on the money that’s stuck in your rainy day warchest.

On the other hand, if you skip the emergency fund and lose your job when the market is down, then you could do even worse by needing to withdraw from your investments at a low ebb.

However I think stoozing can act as a middle ground.

Rather than funding your £40,000 emergency fund at the expense of your investments, you could instead fuel at least a part of the fund with 0% credit card debt. 

Ideally your debts will be structured as a ladder (effectively the opposite of a bond ladder).

Like this, chunks of 0% debt come due each year and can be renewed, rather than the entire amount coming due in the same year, with the risk that lenders won’t cover it all.

This way if you lose your job, you can spend your stoozed cash before needing to touch your investments. This should help you avoid selling your equities at the bottom.

Proceed with caution

Of course my suggestion isn’t a get out of jail free card.

If you burned through your entire emergency fund over the course of a year, then I reckon you’d prefer not to also have £40,000 of credit card debt to think about.

But on the flip-side, you’re protecting yourself against most short-term emergency scenarios, without bearing the full cost of an emergency fund. You should also have a larger investment portfolio to sell from if needed – even if it dips from time to time.

Why not just pay for any emergencies with a credit card if you need to?

Well, I’d argue that you can’t rely on credit cards or lines of credit in a crisis, because lenders can take them away when you need them most.

With my suggestion you’ve taken on the debt already. The lenders gave you the money cheaply when you were less of a risk. 

In contrast they probably wouldn’t want someone who has lost their job to owe tens of thousands on credit cards…but tough luck. They’ve already made their decision and you’ve already borrowed the money.

Finally, if you are on a very secure professional path, like to live by the seat of your pants, and you eat risk for breakfast, then you could go one step further and eschew savings accounts altogether. Just throw your 0% proceeds straight into the market. 

That’s not for me though. It exposes you to too many ways for things to go wrong – and potentially all at once.

Perhaps my mother did get to me after all.

Other downsides to stoozing

On the subject of risk, I’ve heard a drumbeat of a thousand ‘buts’ in the background.

You’re right! There are lots of other negatives to think about before stoozing.

A big one is mortgage lenders. Here you’re at the whims of computer-driven decision machines, who look at your credit file and care little about the interest rate of your debt.

If you’re holding more credit card debt than your annual net salary, they can start to get a bit jumpy. (And not all of us can talk our way into getting a bespoke mortgage.)

One option is to time the ending of your 0% periods around your mortgage renewal date, so you pay them down to a level that lenders don’t care about. (For me this has had the added bonus of reducing the anguish of my long-suffering mortgage broker.)

If you check a couple of ‘How much can I borrow?’ tools from the big lenders, you can get a picture of how much 0% credit card debt you can take on without it wrecking your maximum mortgage borrowing amount. 

Another option is to keep renewing your mortgage with the same lender.

This enables you to secure a more competitive rate than the standard variable rate, but without you having to freshly pass the underwriters’ desk.

On the record

Securing other credit cards and overdrafts can be even more pesky for the same reasons. Again they seem to me to get especially anxious when credit card debt exceeds annual net salary, but it’s not an exact science.

Of course, as dedicated Monevator readers we’d never be looking to get a credit card to actually amass proper Pay Interest To Have Stuff Now debt.

But suppose you wanted to get into the credit card points hacking game?

Someone who could be the perfect candidate for the latest air miles reward card with a juicy £100 sign-up bonus, say, may well be rejected if their credit file makes it look like they’re carrying the same debt as a small developing world country. 

In this case you might write letters of appeal to the underwriters, boasting about your meaty pile of offsetting Premium Bonds. Really – I too was surprised to discover that this can work.

But it takes a pretty special offer to motivate me to try.

Should you start stoozing?

I wouldn’t blame you if you said stoozing isn’t worth the hassle.

But personally I’m expecting to make around £3,000 in net profit this year. And even in the years of rock bottom rates, I still found opportunities. 

To me that’s worthwhile money. All made by doing something I think of as fun.

In true Monevator fashion, I’ve even ploughed my stoozing profits into my investment portfolio. This supercharges the returns from stoozing even further.

The big downside – one that I have no argument against – is that people will think you’re weird if you let it slip that you have 23 credit cards.

So try not to discuss stoozing at parties.

Especially if my mother is there.