Bloomsbury Financial Planning

The fund management group, which is the largest manager of tracker funds in the US, is considering offering tracker funds to retail investors in the UK - a move that could trigger a price war. Vanguard is a mutual, which means it passes on its profits to customers in the form of competitive prices in a similar manner to building societies. In the US, Vanguard and Fidelity compete intensely on tracker fund pricing and some advisers believe if Vanguard were to launch in the UK, a similar price war could erupt over here.

"I think there's every chance it will trigger a price war," says Antony Williams, managing director of Evolve Financial Planning, an independent financial adviser. "There are the likes of Virgin, HSBC and others that take the mickey on pricing." He cites the 1 per cent annual fee on Virgin's UK Index tracker fund, which he says is expensive for a tracker fund.

Tracker funds will never be at the top of fund performance tables. But they should never be at the bottom either. Whereas most funds employ teams of people to perform the near-impossible task of consistently picking stocks that beat the rest of the market, trackers simply buy a representative cross-section of the entire market. Because this is cheap to do, they can charge low fees.

At least that's the theory. But some of the biggest providers charge more than three times as much as Fidelity's competitively priced Moneybuilder index tracker fund (see table).

Ironically, trackers are not particularly high on Fidelity's agenda. "Fidelity is a classic active manager," says Robert Lockie, a chartered financial planner at Bloomsbury Financial Planning. "They're all stock-pickers." He suggests that Fidelity is offering a cheap tracker as a loss leader to attract clients to its other offerings.

One of the factors limiting the growth of tracker funds in the UK has been the dominant position of commission-based IFAs, who do not like trackers because they generate little or no commissions. But Jim Gately, head of Vanguard's international business, says the company was monitoring the growth of fee-based IFAs, who can be more open-minded. Vanguard has been using researchers to find out what types of tracker fund fee-based IFAs would be interested in offering to their clients.

If you want another form of cheap, passive investment, there are two main alternatives. Exchange-traded funds, or ETFs, are listed on a stock exchange and can be bought or sold like shares in companies. One of the main providers is iShares, which provides tracker funds for categories of equities based on company size, region or sector, as well as bonds, property and commodities. The MSCI United Kingdom Index fund, for example, has a total expense ratio of 0.59 per cent, and a chunky $1.12bn under management.

The third type of passive equity investment is an investment trust that acts as a tracker fund. There are not many, and the four main ones have about £900m under management between them. The Edinburgh UK Tracker has a total expense ratio (TER) of 0.47 per cent, and tracks the FTSE All-Share index. But Gartmore Fledgling, which focuses on small-caps, is expensive, with a TER of 1.2 per cent. Probably the best value is the Edinburgh UK Tracker, which tracks the S&P 500 and has a TER of 0.28 per cent.