Why do my lifetime ISA and stocks and shares ISA perform differently if they've both bought the same fund?

Question

I have both a stocks and shares ISA, and a lifetime ISA. I pay similar amounts into both and make sure to keep under the total £20,000 limit. Both ISAs have money in the S&P 500 as accumulator tracker funds. My stocks and shares ISA returns about 10% whilst my lifetime ISA only returns 8%. I know they are different products, but shouldn't they return the same percentage if they are both tracking the same market?

Answer 1

If you have the same tracker (e.g. iShares Core S&P 500 UCITS ETF) in both accounts then performance would be the same if there is no buying and selling in the relevant period. The pricing of the tracker is obviously the same in both accounts.

Differences can and almost certainly will emerge as the result of buying and selling. Paying in and buying shares at different times will likely mean you pay a different price in each account; this will cause a performance difference. If there is a currency exchange involved (e.g. because the tracker is priced in US dollars) then the exchange rate will probably be different too.

Even if you manage to pay the same price, paying in different amounts into the Lifetime ISA and ordinary ISA will cause fixed-price components of the transaction (e.g. flat stockbroker fee, PTM levy) to have a different impact on performance.

Compare buying £90 of stock and a broker fee of £10, with buying £990 of stock and a broker fee of £10. In the first instance the broker fee is 10% of the transaction cost; in the second instance it is 1%. The first instance is a much bigger drag on performance.

Note that the accuracy of the tracker to the actual index is irrelevant.

If they are different trackers (tracking the same index) then the fact that each tracker can deviate from the underlying index in different ways is a further source of difference in performance.

Answer 2

Trackers don’t track the underlying index perfectly, because it would be too complex to do so, and require a lot of trades which would drive up costs. If the S&P 500 increases by 9% over a period, it would be perfectly normal for one tracker to return 8% and another tracker to return 10% over that period. And in the next period, the tracker that under-performed might well out-perform, and vice versa. The only thing to watch out for is a fund that under-performs because it charges excessive fees — for a tracker, that would be anything above 0.5%.