Vanguard comes through with ultra-cheap trackers
Low cost trackers should be great deal for UK investors.
Back in February, we wrote about Vanguard's plans to launch trackers into the UK market. We were highly encouraged given our experience with Vanguard as the low-cost leader in the States, but reserved judgement until seeing the fees on its offerings here. The funds and fees have just been announced (they will be available starting 23 June), and I can safely say I'm impressed.
The highest cost fund will levy an ongoing annual TER of 0.55% per year, and that's for Vanguard Emerging Markets Stock Index fund--a fund focused on an expensive asset class. At the other end of the spectrum, Vanguard FTSE UK Equity Index fund, a FTSE All Share tracker will charge just 0.15% per year, roughly half what the current cheapest tracker in the market--Fidelity Moneybuilder UK Index--charges (the Vanguard fund will levy a 0.50% initial charge, while the fidelity offering does not, but that fee will be easily made up by the TER differential over the long term).
The full slate of funds and their fees is as follows. They are a mix of UK OEICs and share classes of existing Irish-domiciled offerings. The latter have some tax advantages, but Vanguard UK CEO Tom Rampulla says the primary reason Vanguard used them is that they offer better economies of scale, which helps keep fees low.
| Fund Name | TER/AMC | Index | Purchase Fee |
|---|---|---|---|
| Vanguard FTSE U.K. Equity Index Fund | 0.15% | FTSE All-Share Index | 0.50% (SDRT) |
| Vanguard FTSE U.K. Equity Income Index Fund | 0.25% | FTSE U.K. Equity Income Index | 0.50% (SDRT) |
| Vanguard FTSE Developed World ex-U.K. Equity Index Fund | 0.30% | FTSE Developed ex-U.K. Index | None |
| Vanguard FTSE Developed Europe ex-U.K. Equity Index Fund | 0.25% | FTSE Developed Europe ex-U.K. Index | None |
| Vanguard U.S. Equity Index Fund | 0.20% | S&P Total Market Index | None |
| Vanguard Japan Stock Index Fund | 0.30% | MSCI Japan Index | None |
| Vanguard Pacific ex-Japan Stock Index Fund | 0.30% | MSCI Pacific ex-Japan Index | 0.10% |
| Vanguard Emerging Markets Stock Index Fund | 0.55% | MSCI Emerging Markets Index | 0.40% purchase and 0.40% redemption |
| Vanguard U.K. Investment Grade Bond Index Fund | 0.20% | Barclays Capital Global Aggregate GBP Non-Government Bond Index | 1.50% |
| Vanguard U.K. Government Bond Index Fund | 0.15% | Barclays Capital Global Aggregate U.K. Government Bond Index | 0.10% |
| Vanguard Global Bond Index Fund | 0.25% | Barclays Capital Global Aggregate Bond Index | 0.30% |  |
To give some idea of the contrast between Vanguard and its competitors, Pictet charges .70% per year for the institutional class of its emerging markets tracker, and 1.23% per year for the retail class. The average TER/AMC across the Vanguard range is 0.26%. L&G, probably the best known operator of trackers in the UK, is generally more expensive across the board. For example, the institutional class of its L&G UK Index Trust charges 0.21% per year and its retail shares charge 0.52% per year. The difference between L&G All Stocks Gilt Index Trust and Vanguard UK Government Bond Index is similar, with the institutional shares of L&G coming in at 0.22% per year compared to 0.15% per year for the Vanguard fund. Impressively, the Vanguard offerings also undercut the iShares' ETF TERs for equivalent offerings. We note however that Vanguard is listing only AMC's in some cases where it does not yet have a TER, but the firm states it intends to pay all charges out of the AMC.
Whilst some firms, including L&G, offer retail shares with small investment minimums, Vanguard does not. All of its funds in the UK offer a single class with a £100,000 pound minimum. However, we expect they will be available on platforms for retail investors for much lower minimums. This is part of the reason the firm is able to keep fees low: smaller investment amounts are costlier to administer--by effectively outsourcing the administration to platforms, Vanguard is able to run the funds at lower cost. Give their target audience of fee-only planners, they also avoid paying trail commission, which again, helps keep the TERs low.
There are some small initial charges associated with the funds (see table, above) but they are quite reasonable in our view and are clearly stated. That's a refreshing change from the unit-trust approach of having an opaque "spread" that can change through time.
In all, our initial impressions our quite good. The costs are rock-bottom, the transparency is good, and the line up is broad enough to allow investors to easily build a well diversified portfolio composed of trackers. Ideally, the funds would be available with lower minimums, but as we expect them to be present on platforms (which generally impose their own, much lower, minimum investments) it's not a big issue.
Finally, unlike most fund companies in the UK, Vanguard intends to use asset size to put downward pressure on fees as the funds grow. This is standard practice Stateside, where fund firms explicitly state by how much the AMC will be reduced as assets grow past different levels, but is virtually unheard of here. CEO Tom Rampulla said, "This is a starting point. As economies of scale are achieved, we will pass those economies along to investors." Refreshing news, indeed.
