Legal & General US Index: May 2020 fund update

Joseph Hill | Fri 29 May 2020

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• A simple way to invest in the largest stock market in the world
• Legal & General has a good record of running tracker funds and is a provider we rate highly
• It’s one of the lowest cost ways to invest in the US market, which could help the fund track the index closely
• This fund is on our Wealth 50 list of funds chosen by our analysts for their long-term potential

How it fits in a portfolio

This fund invests in a broad spread of US companies, across various sectors of the economy. We think it's a simple way to access companies in the largest stock market in the world and could be used as a way to diversify a portfolio with little exposure to the US. It could also be a good addition to a portfolio of other tracker funds.

Manager

Legal & General has been running index tracker funds longer than most, with a record spanning more than 30 years. It's one of the largest providers of tracker funds and is home to the biggest index tracker team in the UK. That means it's got the resources and expertise to track indices as closely as possible, and the scale to keep charges to a minimum. We think Legal & General is one of the best providers of index trackers around.

Process

The fund aims to track the performance of the US stock market, as measured by the FTSE USA Index. It aims to do this by holding all of the stocks that feature in the FTSE USA index in line with their index weights to replicate its performance as closely as possible. If this isn’t possible for a company, they will hold a temporary basket of similar stocks or look to build up a position over time. Legal & General is a fairly conservative tracker fund manager and the US index fund doesn't lend investments. They look for other opportunities to reduce costs where possible, like when they rebalance the fund to match the index, or by reinvesting dividends.

The fund is currently made up of 610 companies and is focused towards sectors like technology, financials, healthcare and consumer services firms. Some of the companies that feature are global market leaders in their industries, so they aren’t solely reliant on the health of the US economy.

In any index tracker fund, things like withholdings taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. To try and bring it back more in line with the index, the team can use derivatives. The use of derivatives adds risk

Culture

Legal & General has become synonymous with passive funds. Investors have invested around £400bn into its passive funds, allowing them to offer a wide range of index-tracking options. It has also built a team of experienced index tracker fund specialists, and they're prepared to be innovative. If an index doesn’t exist for a sector they’d like to track, they’ll often work with index providers like FTSE Russell to create one so they can track it.

We also admire Legal & General’s commitment to encouraging good corporate practices among the companies they invest in, meaning they are considered good ESG investors. They proactively engage with businesses and use proxy voting rights to highlight important matters like environmental, social and governance issues.

Cost

The fund is available for an annual ongoing charge of 0.06% after a 0.04% saving negotiated by HL. This is lower than the standard 0.1% charge. We think this is excellent value for a US tracker option run by a provider we rate highly. Our platform charge of up to 0.45% per year also applies.

Performance

The fund has tracked the FTSE USA Index well since launch. It's also tracked the index very closely over shorter periods, though over the long run it’s fallen behind the benchmark due to the costs involved. This is to be expected from an index tracker fund.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in future, though there are no guarantees how it will perform.

In some years the fund tracked the index closer than others. On occasion it has even end up slightly ahead of the index due to the strategies used by the team, although this isn’t a guide to the future and isn’t an aim of the fund.

Past performance is not a guide to the future. Source: Lipper IM to 30/04/2020.

More on Legal & General US Index, including charges

Legal & General US index key investor information