Two index funds tracking the same benchmark — say, both following the FTSE All-Share Index or both following the MSCI World Index — can look almost identical at first glance, yet still differ in ways that meaningfully affect the outcome for an investor over time. Because index funds are, by design, not trying to beat their benchmark through manager skill, the differences between similar funds tend to come down to a smaller set of structural and cost factors, which makes them relatively straightforward to compare systematically once an investor knows what to look for.
Step one: confirm they actually track the same thing
Before comparing costs or other details, it is worth checking precisely which index each fund tracks, since similarly named funds can reference subtly different benchmarks. A "UK equity index fund" might track the FTSE 100 (the largest 100 UK-listed companies), the FTSE All-Share (a much broader index including small and mid-sized companies), or another UK benchmark entirely, each with a different number of constituent companies and a different balance between large and smaller companies.
Similarly, a "global index fund" might track MSCI World (developed markets only) or MSCI All Country World Index (including emerging markets), as discussed elsewhere in this guide. Two funds cannot be meaningfully compared as genuine alternatives unless they are actually tracking the same, or a very similar, underlying index.
Step two: compare the ongoing charges figure (OCF)
Once it is confirmed the funds track comparable indices, the ongoing charges figure is usually the next and most visible point of comparison. Since both funds are attempting to replicate the same index rather than out-perform it through active decisions, a lower OCF is, all else being equal, generally preferable — there is no active management skill being purchased to potentially offset a higher fee, in contrast to comparing two actively managed funds where a higher fee might, at least in theory, be attempting to buy additional expertise.
That said, "all else being equal" is doing real work in that sentence, which is why OCF should not be the only factor considered, as the following steps illustrate.
Step three: check tracking difference, not just OCF
As explained in more detail elsewhere in this guide, a fund's tracking difference — how closely its actual net return has matched its benchmark index over time — can diverge from what the OCF alone would suggest, due to factors such as securities lending revenue, replication method, and withholding tax efficiency. Many providers publish tracking difference data comparing their fund's return against the underlying index over several time periods, which is worth reviewing alongside the OCF rather than instead of it.
Step four: check replication method
Index funds can use full physical replication (holding every constituent of the index in matching proportion), sampling (holding a representative subset designed to closely approximate the index's behaviour), or synthetic replication (using derivatives, typically a swap, to deliver the index return). Each approach carries a different risk and cost profile, and two funds using different replication methods to track the same index may show different tracking characteristics as a result, even with similar headline OCFs.
Step five: compare fund size and liquidity
A larger, more established fund often (though not always) benefits from economies of scale that can support a lower OCF over time, and larger funds are generally less exposed to the risk of the provider deciding to close or merge the fund due to insufficient scale. For an ETF specifically, fund size and the number of active market makers can also affect typical bid-offer spreads, as discussed elsewhere in this guide.
Step six: check the fund's structure and where it's domiciled
Index funds tracking the same benchmark are available as traditional open-ended funds (unit trusts or OEICs) or as ETFs, and can be domiciled in the UK, Ireland, Luxembourg, or elsewhere. This affects how the fund is bought and sold (a single daily dealing point for open-ended funds versus continuous exchange trading for ETFs), and can have implications for UK reporting fund status and tax treatment when held outside an ISA or SIPP, as discussed elsewhere in this guide.
Step seven: consider the share class and income treatment
As with any fund, checking whether an accumulating or distributing (income) share class is being compared matters, since these have different practical implications for income received and, for holdings outside a tax wrapper, different reporting considerations, even though they track the same underlying index.
A structured comparison checklist
| Factor | What to check |
|---|---|
| Underlying index | Confirm both funds track the same or a genuinely comparable benchmark |
| Ongoing charges figure (OCF) | Compare the headline annual cost, generally favouring the lower figure for like-for-like index funds |
| Tracking difference | Review published historical performance against the benchmark, not just the OCF |
| Replication method | Check whether the fund is physical, sampled, or synthetic |
| Fund size | Consider scale and its potential link to future costs and closure risk |
| Structure and domicile | Open-ended fund versus ETF, and where each fund is domiciled |
| Share class | Accumulating versus distributing, and reporting fund status if held outside a wrapper |
| Trading mechanics (for ETFs) | Typical bid-offer spread and number of active market makers |
A worked example
Suppose an investor is choosing between two hypothetical funds both tracking the FTSE All-Share Index. Fund A is an open-ended OEIC with an OCF of 0.10%, full physical replication, and a three-year average tracking difference of -0.08% a year relative to the index. Fund B is an ETF with an OCF of 0.07%, also using physical replication, but with a three-year average tracking difference of -0.15% a year, alongside a typical bid-offer spread of around 0.03% for a retail-sized trade.
On OCF alone, Fund B looks cheaper. Once tracking difference is factored in, Fund A has actually delivered a return closer to the index over the historical period examined, despite its higher headline OCF, illustrating why tracking difference is a genuinely useful complementary check rather than an optional extra. For a long-term buy-and-hold investor, Fund A's smaller tracking gap may outweigh Fund B's lower OCF and modest spread advantage; for a shorter-term or more actively trading investor, the calculation could look different. This example uses simplified, hypothetical figures purely to illustrate the comparison process, not to represent any specific real fund.
Reading published fact sheets side by side
A practical way to carry out much of this comparison is to open both funds' Key Investor Information Documents (or the UK's equivalent prescribed disclosure document) and fact sheets side by side, since both are required to present costs, risks, and past performance in a broadly standardised format. This makes it easier to line up the OCF, historical performance against benchmark, top holdings, and risk indicators for two funds without needing to hunt through inconsistent formats across different providers' websites. Many UK platforms also provide their own comparison tools that pull several of these data points together automatically, which can save time, though it remains worth checking the underlying fact sheets directly for anything the platform's summary does not cover, such as detailed replication methodology or securities lending policy.
A note on past tracking difference
As with all historical fund data, past tracking difference is not a guarantee of how a fund will perform relative to its benchmark in future periods, since factors such as securities lending revenue and market conditions affecting replication efficiency can change over time. It remains a useful data point precisely because it reflects how the fund has actually been managed and operated in practice, rather than an untested theoretical figure, but it should be read as one input among several rather than a definitive predictor.
Practical steps to follow
- Confirm both funds track the same or a directly comparable index before proceeding with any further comparison.
- Compare OCF as a starting point, but do not treat it as the final answer.
- Review published tracking difference over multiple time periods, where available.
- Check replication method, fund size, domicile, and share class.
- For ETFs, also check typical bid-offer spread relative to the intended trade size.
- Revisit the comparison periodically, since fund charges, tracking performance, and structures can all change over time.
Where UK tax wrapper choice fits into the comparison
How and where each fund can be held is also worth factoring in. Most mainstream UK index funds and index-tracking ETFs, whether open-ended or exchange-traded, can be held within a Stocks and Shares ISA (subject to the £20,000 combined annual allowance for the 2025/26 tax year) or a SIPP (subject to the £60,000 pension annual allowance, or 100% of earnings if lower), where income and gains are sheltered from UK tax. If a fund is instead being considered for a general investment account, checking UK reporting fund status becomes relevant, since a fund lacking this status can see gains taxed as income rather than under capital gains tax rules, which is generally less favourable. None of this changes which fund more closely tracks its benchmark, but it can materially affect the after-tax outcome of holding either fund, and is worth factoring into an overall comparison rather than treated as a separate, unrelated question.
Key takeaways
- Comparing two index funds tracking the same benchmark starts with confirming they genuinely track the same or a closely comparable index.
- The ongoing charges figure is a useful starting point, but tracking difference can reveal a fuller picture of real-world cost efficiency.
- Replication method, fund size, structure, domicile, and share class can all meaningfully differentiate otherwise similar-looking index funds.
- For ETFs, bid-offer spread is an additional practical factor beyond OCF and tracking difference.
- A worked, hypothetical comparison shows how a fund with a slightly higher OCF can still deliver a closer match to its benchmark than a nominally cheaper alternative.
- Past tracking difference is informative but not a guarantee of future relative performance, and comparisons are worth revisiting periodically.