Not many fund firms have a fanbase but Vanguard does. Its cheerleaders are the Bogleheads, disciples of Vanguard’s visionary founder John Bogle – the man who brought index investing to the masses.
Passive investors are passionate about Vanguard for two main reasons:
1. It offers index funds at rock bottom prices.
2. The company has a hard-won reputation for serving investors’ interests.
Cheap index funds are the most important weapon in the armoury of a passive investor. A recent study by Morningstar concluded:
If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.
And since US-giant Vanguard entered the UK market in 2009, it has blazed a trail with a low cost range of index funds that rivals struggle to match.
If you’re investing for the long-term and you want a:
- FTSE All-Share index fund – Vanguard is the cheapest1
- Emerging markets index fund – Vanguard is the cheapest2
- UK Government bonds index fund – Vanguard is the cheapest3
So Vanguard is the answer to every UK passive investor’s prayers, eh?
Not so fast. In Blighty, it’s never that easy.
The Catch
Buying index funds is normally straightforward. You pick a fund from the investment platform of your choice and – if you choose wisely – you won’t get stung for dealing fees or annual administration charges.
Not so with Vanguard.
Only six platforms offer Vanguard funds to D-I-Y retail investors (i.e. little guys like you and me, as opposed to big institutions). All carry extra cost baggage.
Your six platform choices:
Investor Profile and the Fair Investment Company can be ditched straight away because of their annual charges: 0.5% and 0.85% respectively. An annual charge is like walking around with a leech on your back – it’ll get fat at your expense in the long run.
It used to be that Alliance Trust was the only cost-effective option for Vanguard funds. Now the situation is not so clear-cut. Alliance Trust often still has the upper-hand, but it depends on how many funds you have, in which account, and how often you trade. See here for the latest update.
If Alliance Trust is still best for you then you need to know about the following wrinkles.
There’s no annual management charge with Alliance Trust, but it does stick you for the following:
- £12.50 dealing fee
- £5 automatic dividend reinvestment
- £10 cash withdrawal charge
- £30 annual ISA charge4
A dealing fee is the stuff of ETFs, not index funds. It’s like paying an upfront charge for your fund – a wealth-sapping wheeze that passive investors should almost always avoid.
But if you want Vanguard, you have to pony up. The extra costs whittle away Vanguard’s advantage, so the next step is to soften the blow:
- Reduce £12.50 to £1.50 per trade using Alliance Trust’s monthly dealing service.
- Or, only buy when you have a hefty sum to invest. e.g. A £2,500 contribution reduces the £12.50 dealing fee to a reasonable 0.5% hit.
The dealing fees radically alter the picture. Vanguard funds can still work out as the cheapest option over the long term. But it’s crucial to know what ‘long term’ means.
Here’s a quick snapshot of Vanguard versus its closest index fund rival to illustrate the point:
| Index fund | Dealing fee (%) |
Upfront fund fee (%) |
TER (%) | Vanguard wins (years) |
| Vanguard FTSE UK |
0.5 | 0.5 | 0.15 | 16 |
| HSBC FTSE All-Share |
0 | 0 | 0.27 | - |
| Vanguard US Equity |
0.5 | 0 | 0.2 | 7 |
| HSBC American Index |
0 | 0 | 0.28 | - |
| Vanguard UK Gov Bond |
0.5 | 0.15 | 0.1 | 5 |
| HSBC UK Gilt |
0 | 0 | 0.27 | - |
Assumes monthly contribution and all funds grow at the same fixed annual rate.
Clearly the ‘long term’ is highly variable. If you don’t intend to hold for as long as it takes to get the edge, then Vanguard is not the cut-price choice.
Investing frequency and the dealing fee percentage are also critical. The less often you invest and the lower the dealing fee damage, the quicker most Vanguard funds win on cost.
Yet the other side of the coin is that Vanguard index funds are not for investors who want to drip-feed in a few hundred quid every month.
Use a fund cost comparison calculator to run your own scenarios. Scroll down to the investment section to play with the calculator. Treat the dealing charge as an initial charge. TER goes in annual charge.
Also bear in mind that HSBC funds can be bought on platforms that don’t charge an annual fee for an ISA, such as Interactive Investor.
The Dodge
You can dodge the pricey £5 automatic dividend reinvestment fee by picking accumulation funds, not income funds.
Accumulation funds reinvest dividends straight back into the fund without the money getting anywhere near Alliance Trust’s sticky mitts. Reinvesting dividends is the investing equivalent of sling-shotting around Jupiter so it’s an easy choice to make, if you don’t need the income.
Finally, Alliance Trust’s £10 cash withdrawal charge is bizarre. It’s happy to receive cash via the magic of the Internet, but it’s not so quick to dish it out. To withdraw money you have to fill in a form. When Alliance Trust receives the form, it posts you a cheque. For the pleasure of this ‘service’ you must pay £10. Every time. It’s an arcane and unjustifiable practice.
Personally, I discount the withdrawal charge because I’m investing for the long term and don’t intend to siphon off any cash for years. The more obstacles between me and a quick raid of the till, the better as far as I’m concerned. I also assume that competitive pressures will force Alliance Trust to reform this charge in the future. Still, it’s worth knowing about if you’re investing for income.
If you’d like to find out more about Alliance Trust before taking the plunge, check out the dedicated Motley Fool forum board.
The Red Herrings
You may get a fright when you discover the minimum investment in a Vanguard index fund is £100,000, according to some news reports and even the official prospectuses.
Happily, that’s only true if you buy directly from the firm. There is no minimum if you invest using a direct debit card through Alliance Trust.
The other thing that smells a bit fishy is Vanguard’s cost structure:
- A number of its funds charge upfront fees.
- Received wisdom says you shouldn’t pay upfront fees on index funds.
- Vanguard claims these fees are levied in the interests of transparency.
- It says its rivals bundle up these fees in inflated Total Expense Ratios (TERs).
The upfront fees cover fact-of-life items like trading costs and stamp duty. Vanguard’s point is that investors are left none the wiser about these charges if they are buried in the TER.
The bottom line is that, in most cases, Vanguard’s index funds still work out to be cheaper than rival offerings, over the long term, when you compare fund costs directly. What you lose upfront, you gain in pygmy TERs. And the effect becomes more pronounced over time.
Though upfront fund costs should be taken into account, ultimately it’s the dealing fees that are make or break. Use the fund cost comparison calculator to help you decide whether Vanguard is worth it for you.
There’s no doubt that UK passive investors are faced with slim pickings compared to US coach potatoes when it comes to low cost index funds. But we were practically on prison food before Vanguard arrived.
Vanguard has given the market a shot in the arm, and if trackers are part of your mix, you owe it to yourself to take a look at its range.
Take it steady,
The Accumulator
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- Comparison of fund costs versus nearest index fund rival [↩]
- Again, comparing fund costs with the nearest index fund rival [↩]
- You’ve seen this movie before [↩]
- If you opened your account after Feb 2, 2011. You also get two trades thrown in for free. [↩]
{ 27 comments… read them below or add one }
From what you say about Investor Profile’s annual charges I assume you are referring to their “Transact Wealth Management Portfolio”. They have a free option for investing in unit trusts or ISAs but that doesn’t seem to include Vanguard on its list of funds.
Thanks for the detective work on Alliance Trust’s charges – I hadn’t noticed them! Good thing I’m not investing yet…
I’m most likely to invest via my existing SIPP, rather than open an account with Alliance Trust, and have previously invested in Ishares ETFs (TER = 0.4%). My SIPP has no annual charge, but it charges £9.95 per deal (buying and selling) plus any stamp duty. However, for Vanguard funds I’ve checked and seen that it charges 0.5% “initial commission”. Based on your articles, I input all charges (including the TERs) into a spreadsheet and found that it would still be worth buying Vanguard funds, simply because their TER is so much less than anyone else. (I assumed that I would keep the investment for 5 years and there would be no growth. In practice I’d hope to keep the funds for longer and expect my investment to increase in value, which would make Vanguard even more attractive!)
I think that investors who don’t want to open a new account with Alliance Trust do their own comparisons and take full account of the very low ongoing running costs of Vanguard funds that The Accumulator has drawn our attention to.
Thanks for highlighting this!
Have you covered in other posts why there are these costs and restrictions on index fund offers in the UK? As you know in the US where I’m based you can buy inexpensively directly from Vanguard — in fact they recently lowered some costs — and don’t face the high minimum investment you talk about.
I ask about the reason for the restrictions, because I wonder if those are likely to fall away in time or seem set in stone?
@Niklas – That’s right you buy Vanguard through the Transact option.
@ Tony – If you don’t mind me asking, who’s your SIPP with?
@ Nanette – Vanguard have only been active in the UK market for a year. Publicly they’ve talked about taking a softly softly approach, so I expect the situation will improve over time. They’ve already made an impact. Within a week of Vanguard’s initial launch, HSBC knocked 50% and more off the price of their index funds. It just goes to show what firms were getting away with in the UK.
Why are Vanguard restricted to two platforms over here? They say it’s because they don’t pay distribution fees to the fund supermarkets. So I guess they couldn’t do a deal with platforms that took exception to that strategy. Investor Profile and Alliance Trust apparently make up the difference through management charges and dealing fees respectively.
Transparency is important to Vanguard. They would rather you knew what you were paying to the platform than bump up the TER to pay for a distribution fee that, as an investor, you’d be none the wiser about.
Hi TA
I’m one of the big fans of Vanguard. I currently hold Vanguard funds from the Australia arm of the organisation.
As mentioned previously I’m looking to transfer a large Stakeholder fund to a SIPP. Alliance Trust with Vanguard as you mention is one option but close on its heels is SippDeal using iShares and db-xtrackers ETF’s. By my calculations for my fund pot (which will also hold some Gilts and Property) I see a 0.08% difference per annum.
Cheers
RIT
.-= RetirementInvestingToday on: No nonsense FTSE 100 cyclically adjusted PE ratio update – October 2010 =-.
@Nanette and @Accumulator – I think it’s partly a scale thing, as well as the woeful state in general of British financial services that have led some firms to dub the UK ‘Treasure Island’.
It is a lot easier to bring TERs down when you have a potential audience of 240 million people, a reasonable percentage of whom are engaged investors, as opposed to just 60 million people, the majority of which are engaged telly addicts who at best grew comfortable letting our formerly enviable final salary pension scheme culture look after their old age interests…
@Accumulator
My SIPP is with Sippdeal (I wasn’t sure it was appropriate to mention their name).
I pay ~£38 a year at Selftrade – this includes several free trades per year (normal cost £12.50 – I use these to purchase with lump sums several times per year) plus a fee on “regular investment” (once/monthly) purchases of only £1.50, through which I dripfeed into an index fund. I thought this was a good deal but Selftrade doesn’t seem to be mentioned!
Should I be looking elsewhere? Is that annual charge really a killer when I use the free trades the reg investment is so cheap?
Thanks!
Mark.
@Mark – With any kind of fixed fee you have to calculate the cost relative to the size of your portfolio, especially when comparing to other kinds of fees structures.
To state the obvious, £38 has a very different cost impact on a £1000 portfolio compared to a £100,000 one, whereas a 0.5% pa charge would have the same relative impact.
It also depends if you can get a better deal anywhere else. That Selftrade deal may well be the best fit for you, and they’re regularly praised on the forums. They don’t sell UK Vanguard funds though.
Your 3 free trades essentially wipe out the annual charge, it’s true. But if you’re drip-feeding @ £1.50 a throw anyway, you could occasionally make a lump sum purchase via the regular trading scheme. You would then cancel the purchase before the next month’s trade. So with a no-annual charge broker like iii or TD Waterhouse, you could make every trade at £1.50 and save yourself the annual charge.
It’s a bit fiddly, I admit.
Thanks for the feedback – I’ve only got around ~10k portfolio (I’m 28!) but I do enjoy Selftrade’s service and online platform, so I guess that has to factor into the price.
I’ll just have to grow my portfolio to make it ever more economic with those fixed costs!
@Mark – You’re welcome. I’m slightly less maniacal about costs than The Accumulator (which is exactly why I asked him to write for us!
) and I use all sorts of brokers and rack up trading fees, too. But importantly I’m not following a pure passive approach, and I expect (against the academic evidence) to generate superior gains to pay for my excess costs. (Like everyone does, but few private investors do – so beware you’ll probably lose money if you’re active both on under-performance and on higher fees).
If you’re following a passive approach then it makes sense to squeeze out every last penny in costs, because that’s the main place where where your performance is going to suffer versus the market. (Aside from tracking error, poor asset allocation decisions, etc).
Thanks for another very good article.
From your analysis it strikes me a combination of Vanguard and the HSBC fund may be the way to go to cover the FTSE All Share element of my intended portfolio.
I can see myself having a ‘rump’ holding in Vanguard which I won’t intend to sell and top it up with HSBC.
I say this on the basis I expect to do some occasional (e.g. yearly) rebalancing of the asset allocation – if I was rebalancing UK FTSE I would then sell the HSBC rather than Vanguard tracker.
Just a thought.
I’ve also been looking a couple of L&G funds for fixed interest – charge appears to be .20%
L&G All Stocks Idx Linked Gilt Index
L&G All Stocks Gilt Index
Rgds
R
Rhinestone, that sounds like a pretty smart idea as Alliance Trust whack you for a £12.50 sales charge into the bargain.
I’ve been nosing around that L&G Linker fund too. It’s not ISA compatible and I found a newly minted factsheet last night that showed a TER of 0.25%.
http://lt.morningstar.com/t4859pbp8n/snapshotpdf/default.aspx?SecurityToken=F0GBR054A2%5D2%5D1%5DFOGBR$$ONS_163
I’m a customer of Sippdeal, one of the companies mentioned in the comments above. Although Vanguard aren’t on their funds list I’ve been able to purchase them. They don’t have an annual charge, and dealing costs me £9.95.
Thanks for the info, Sipp Investor. Weird that Vanguard aren’t on the funds list. I wonder why that is. Did Sippdeal tip you off about them?
Interesting you mention that as most of my funds within my SIPP are Vanguard Funds via Alliance Trust and a few ETF. I am now overhauling my ISA which I have had for about 8 years on the Fidelity platform (Via Cavendish Online), given my recent enlightment about indexing and ETFs I now thinking of moving the ISA to a platform that offers more ETFs and Index Funds and I believe Sippdeal would be a good option, although I would wellcome other comments.
Yep your right I had this email from Sippdeal today offering the following vanguard funds:
Vanguard Emerging Markets Stock Index Fund
Vanguard Exchange Traded Funds
Vanguard FTSE Developed Europe ex-UK Equity Index
Vanguard FTSE Developed World ex-UK Equity Index Fund
Vanguard FTSE UK Equity Income Index Acc
Vanguard FTSE UK Equity Index
Vanguard Investment Series plc
Yours sincerely
Sippdeal Enquiry | Client Management Team
Fascinating that they’re offering Vanguard ETFs. Vanguard don’t offer ETFs in Europe at the moment, though there has been talk about it. I guess those must be US domiciled ETFs?
According to the Best Invest website the HSBC FTSE All-Share Index fund has a 0.25% AMC giving a 0.39% TER so the above comparison moves more in Vanguard’s favour. SIPPdeal confirmed to me that they do sell Vamguardd funds on line but you have to pay a dealing fee as presumably you would do for other funds with them. I have used Vanguard in the US and they are great. I considered moving part of my pension to Alliance Trust to access Vanguard but the annual and other charges put me off so I now I can do this through my SIPPdeal account instead. Still looking for the best dealing site for my son to start regular saving that allows cost efficient monthly contributions and access to low cost tracker funds like Vanguard without high account or high dealing fees. I am with Barclays on-line stockbrokers for regular non ISA investment but not being able to buy funds on-line (you have to call and pay more) is a real bind. I wish they would get their act together.
Martin, this article may help your son. Index funds without dealing fees in a no-cost account: http://monevator.com/2011/01/06/passive-investing-model-portfolio/
The Accumulator – Thanks for pointing me to the article – very useful
Hi,
I have a Fidelity All share tracker ISA (through Fidelity) and my wife the HSBC All share tracker. Both have TER’s <0.3% without any other charges.
I'm fairly new to the investment market (so likely naive comment) but are these not the cheapest trackers taking into account all of the Vanguard charges……or are we talking about something else…?
Help…..my brain is going to explode
Steve W.
Hi Steve, if you invest enough each time to reduce the trading charges down to, say, 0.5%, then Vanguard comes out ahead after several years. I wouldn’t worry too much about it though, the difference is marginal.
Does anyone know of the cheapest platform currently for ‘Vanguard US Equity Index Fund’, I’ve been doing lot’s of research but It’s a minefield out there.
Would appreciate any advice.
Thanks
Does anyone think there is currently a better American Index than this for price?
http://services.assetmanagement.hsbc.co.uk/site/media/pdf/Factsheets/OEIC/oaiGBP.pdf
Looking to invest a 15k lump in it.
Thanks Daniel
The Vanguard US Equity index fund has a TER of 0.2%, but you’d want to look into annual management charges or platform fees levied by the broker for your funds.
Re: best platform for Vanguard, usually it’s Alliance Trust but check out this article http://monevator.com/2011/12/13/hargreaves-lansdown-vanguard-funds/
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