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Vanguard offer some of Britain’s cheapest index funds, but there’s a catch

Note on 8/8/2016: The “catch” in this article is no longer true – there is no longer a special additional charge when investing in Vanguard funds, following changes following the RDR legislation. But Vanguard is still really cheap! See our most recent list of cheap trackers.

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. An influential 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:

  • Diversified fund-of-funds portfolio – Vanguard is the cheapest.1
  • Emerging markets index fund – Vanguard is the cheapest.2
  • UK Government bonds index fund – Vanguard is the cheapest.3

The only problem is that you can’t just roll up to any online broker and start ordering Vanguard…

The Catch

Vanguard's funds are cheap, but there's a catch

Buying index funds used to be 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.

Vanguard funds are not yet freely available among UK brokers/platforms. Many initially refused to stock the funds because Vanguard wouldn’t pay them nice, cosy commissions just to play the game.

But Vanguard’s view of the world is gradually prevailing, as the UK financial industry is weened off commission by the Retail Distribution Review (RDR) shake-up.

That means Vanguard funds are turning up on more and more platforms.

Before you slap your money down though, you need to ensure two things:

  • That you choose a platform that minimises the extra charges often levied on Vanguard (and increasingly on other funds) to claw back the loss of commission.
  • That the platform stocks the Vanguard funds you want. Vanguard has the best range of index funds in the UK but many platforms only stock a limited selection.

Easy life

The simplest solution is to choose Vanguard’s LifeStrategy funds. These are fund-of-funds: a bumper pack of investments that offer a diversified, automatically rebalanced portfolio in a single wrapper.

It’s like buying a multi-pack of crisps except the Salt ‘N’ Vinegar option is flavoured FTSE All-Share, Cheese ‘N’ Onion is the rest of the Developed World, and Prawn Cocktail is the Emerging Markets.

If you follow this route then TD Direct currently offers the LifeStrategy funds without platform fees, management charges, dealing costs, or any other slippery trip hazard beyond the Total Expense Ratio / Ongoing Charge Figure, as long as your account is worth over £5,100 (ISA) or £7,500 (standard dealing account).

TD Direct also stocks a few of the other Vanguard funds – but far from all. If you want to choose from the full range then take a look at the likes of:

  1. Alliance Trust
  2. Sippdeal
  3. Bestinvest

If your broker imposes dealing charges to trade Vanguard then look for a regular investment option that squeezes fees. A one-off trade costs £12.50 at Alliance Trust, but you can slash this to £1.50 by drip-feeding in via Direct Debit using its Monthly Dealing account.

Monthly Dealing doesn’t commit you to buying the same fund month-in, month-out. You can switch funds any time you like or even stop buying after just one trade.

If you want the full Vanguard range and you make more than eight monthly purchases a year (or sell even once) then Bestinvest trumps Alliance Trust (if you hold your funds in an ISA or standard dealing account).

Sippdeal comes into play for SIPPs. You can see a more detailed comparison of the three broker’s offerings here.

Complications

Hargreaves Lansdown carries the same (limited) fund range as TD Direct but there’s no way to duck its platform charges.

You’re only better off with Hargreaves Lansdown if you can’t make TD Direct’s no-charge minimums and you only hold one fund (in your ISA) or two funds (standard dealing account) or less than six funds (SIPP).

Capiche?

In fact, if your strategy is to hold one or two Vanguard LifeStrategy funds in a SIPP then go with Hargreaves Lansdown.

What about rival tracker providers? HSBC come closest to matching Vanguard’s range, especially with its new C Class index funds. Like Vanguard, these funds strip out trail commission payments and have dirt cheap TERs. If you can find them unencumbered by platform fees then they can match or beat some Vanguard funds.

Again, TD Direct is the place to look, and if you want a tie-breaker to decide between the rival ranges then compare tracking error.

Some Exchange Traded Funds (ETFs) can also give Vanguard’s funds a close run for their money, none more so than its own in-house range.

ETFs are subject to dealing fees and bid-offer spreads that make their bald TERs less advantageous than they first appear. But at the very least, it’s worth comparing Vanguard’s ETFs with their index funds, where they overlap, to make sure you get the best deal.

You’ll be able to buy Vanguard ETFs at virtually all brokers who offer London Stock Exchange ETFs. You should be able to pick them up for £1.50 a throw via a regular investment scheme.

Compare your options using a fund cost comparison calculator and insert the cost of dealing fees into the initial charge section.

The Red Herrings

You may get a fright if you read somewhere that the minimum investment in a Vanguard index fund is £100,000, according to some news reports and even the official prospectuses.

But happily that’s only true if you buy direct from the firm. There’s no minimum if you invest through an intermediary like a discount broker or online platform.

The other thing that can smell 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-sized 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 works best 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

Update note: This article was updated in mid-December 2012 to take account of the many developments since Vanguard first arrived in the UK. Comments below may refer to out-of-date information, so check the date of commenting!

  1. Comparison of fund costs versus nearest index fund rival. []
  2. Again, comparing fund costs with the nearest index fund rival. []
  3. You’ve seen this movie before. []
Filed under: Passive investing

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{ 121 comments… add one and remember nothing here is personal advice }
  • 100 The Investor January 28, 2013, 9:41 pm

    @ivanopinion — We’re not arguing, we’re discussing, right? 🙂 I have seen from experience people hate losses much more than they like gains. There’s stacks of research to that end, too.

    Personally, I’ve been up to 100% invested in equities, so I’m not talking about me here.

    I don’t think your last paragraph holds at all, it’s a false choice. If someone can cut the risk of losing X by forgoing Y, that might be rational. It’s the whole appeal of Guaranteed Equity Bonds, for good or ill (which you may have seen I’ve in the past unwrapped in a DIY version for risk averse investors who don’t want to buy opaque products from banks with high fees).

  • 101 ivanopinion January 29, 2013, 12:14 pm

    Sure, discussing. I was really struggling to follow what you were saying until it clicked that you were talking about people who place greater weight on avoiding losses than on potential gains, even if the odds are in favour of the gains. I agree that there is lots of evidence that many people hate losses more than they like gains. Arguably, it is irrational to do so. However, I suppose that if you define your investment objective as aiming to minimise losses, you could then say that it is rational to choose PCA over upfront lump sum.

    The way I look at it, it is axiomatic that if you are investing in equities you have accepted the considerable downside risks in return for the likelihood that in the long run equities will perform better than your alternatives (savings, bonds, etc). History suggests that as long as you are prepared to be patient, equities will always outperform in the long run. However, if you invest at what turns out to be the wrong time, you might need to be very patient indeed. To choose an extreme example, the total return on the Nikkei is still down 70% on its peak in 1989, after at least 22 years. I think there are periods of more than a decade when the UK and US markets have also delivered negative total returns.

    If you have accepted that considerable downside risk in return for the considerable upside risk, it would seem inconsistent to favour PCA over upfront lump sum.

    However, if you are the kind of equity investor who uses guaranteed equity bonds to limit your downside (sacrificing a lot of the upside) then I could see that PCA would be a consistent choice.

  • 102 YC January 29, 2013, 12:27 pm

    @ivanopinion: “The way I look at it, it is axiomatic that if you are investing in equities you have accepted the considerable downside risks in return for the likelihood that in the long run equities will perform better than your alternatives”

    One could counter that in the end, you will not gain the ensemble average, but rather you will gain an individual realisation of one possible outcome. And even if you think in terms of time averages… I think a famous quote has it that “in the long run we are all dead” 🙂

    Given that, and if most of the volatility in the markets is in fact captured by only a few days in history (note I’ve never really checked this myself, so I’m just parrotting Nassim Taleb here), then it could make sense to perform PCA: at relatively small cost, you’d reduce risk significantly.

  • 103 Medicine Man September 23, 2013, 10:11 am

    I am lucky enough to have control of a fund that is larger than the minimum £100,000 needed to invest direct with Vanguard.

    I’m currently with Bestinvest, who seem to do a reasonable job for a relatively small fee.

    If I went with Vanguard direct then obviously I’d be able to bypass the fee and the middle man. However, given that the fees are small in proportion and that Vanguard showed a spectacular lack of interest when I emailed them I’m not quite sure of the motivation to move.

    Anyone got any thoughts or done it themselves? If Vaguard’s email to me is an indicator of customer service then I’d definitely stick where I am!

  • 104 Newton July 16, 2014, 11:10 pm

    How about Charles Stanley? They seem cheaper (0.25% – and if you decide to trade, it’s GBP 10 vs GBP 12.5 at TD Direct)

  • 105 Dik September 28, 2014, 1:38 am

    I want to invest in FTSE with Vanguard. Their OEIC fund, VVUKEQ, charges 0.5% initial and 0.08% pa.
    Their FTSE 100 ETF, VUKE, charges 0.09% pa and of course I would pay the bid/offer spread, which seems to be approx 0.01%.
    But do I pay the Vanguard initial charge when I buy the ETF?

  • 106 The Accumulator September 28, 2014, 6:58 am

    Hi Dik, no initial charge on the ETFs.

  • 107 Dik September 28, 2014, 12:16 pm

    Thanks The Accumulator. That’s what I thought. I suppose some might prefer the fund if their broker charges a high dealing fee.

  • 108 The Accumulator September 28, 2014, 12:29 pm

    I prefer the fund because it tracks the FTSE All-Share rather than the FTSE 100. True, the All-Share is dominated by the 100 but it’s better diversified overall.

    Also, the initial charge is used to cover the stamp duty costs of buying the underlying shares. Although there is no stamp duty charge to buy the ETF, the APs will still be paying this to buy the underlying shares that constitute the ETF and I dare say that cost falls to the investor somewhere.

  • 109 Dik September 29, 2014, 12:21 pm

    Forgive my ignorance, but what are “APs”.

    When someone like me buys ETFs is it like buying shares in the sense that I am buying existing ETFs or are my ETFs created specially?

  • 110 The Investor September 29, 2014, 1:02 pm

    @Dik — No need to ask for forgiveness, a bit of a slip by The Accumulator to lapse into industry speak in this home of Proud DIY-ers. 🙂

    I believe he is referring to Authorised Participants. These are the companies that buy and sell shares and ETFs as part of ensuring a particular ETF holds the correct securities such that its holdings and its pricing tracks the appropriate index.

    I am simplifying here. See this article http://www.etf.com/etf-education-center/21014-what-is-the-creationredemption-mechanism.html

    That should also help answer your second question. 🙂

  • 111 Dik September 29, 2014, 1:32 pm

    Interesting. Especially “Ultimately, investors entering or exiting the ETF pay these costs through the bid/ask spread.”. But the spread on the Vanguard FTSE 100 ETF is currently 0.05% so much less than the fund’s initial charge and much less than stamp duty. If the APs are market makers do they pay stamp duty?

  • 112 WeeBeastie October 1, 2014, 3:56 pm

    Dik, Vanguard’s ETFs are “Irish domiciled” so for normal investors you are buying or selling an Irish security and there’s no stamp duty to pay. However new ETF shares are created as demand requires. This tpically happens in large lots, perhaps 100,000 shares, and the AP then has to go out and buy all the underlying components of the FTSE100. That transaction effectively takes place under UK jurisdiction and the 0.5%stamp duty is payable at that stage.

    Mutual funds work in much the same way but because the FTSE ALL Share OEIC is UK domiciled then stamp duty is paid both when new units are created and when they are traded from one person to another. That has been true for all UK domiciled funds for a long time but will be changing shortly so that the stamp duty is only paid, like the ETF. when underlying shares are bought and not when units are traded.

  • 113 Andrew November 3, 2014, 10:35 pm

    Hi,

    I recently became a dad and want to start putting money into a Stocks & Shares ISA for my son. This would be my first time investing so I have little to no idea about what to do – something quick and easy would be great.

    I was therefore thinking of going through with the LifeStrategy funds – would this be the best option? If so, were best to go; alliancetrustsavings.co.uk as above?

    Thanks

  • 114 WeeBeastie November 4, 2014, 3:02 pm

    Andrew

    I would avoid ATS for back junior ISA. They charge £50 pa which is over 1% pa. I’m about to close those I have with them for my own children – indeed for the family as a whole they are no longer the best value and seem to have lost their way.

    I think the best platform ISA charge deal at present is with AJBell/Youinvest. From what I’ve seen they have no annual charge and a £4.95 dealing fee. Looks like they are ousting ATS from the low cost sector.

  • 115 Andrew November 4, 2014, 10:49 pm

    Hi WeeBeastie,

    Thanks for your reply. I’m not completely sure about dealing fees. If I do a monthly direct debit over a year, would that be 12x dealing fees and therefore more than the £50 pa from ATS?

    Thanks

  • 116 WeeBeastie November 4, 2014, 11:48 pm

    Andrew

    You can find the details of the YouInvest JISA here – looks like its 1.50 a month for regular deals.

    http://www.youinvest.co.uk/JuniorISA/Offer/

    ATS also seem to charge 1.50 a month but that appears to be in addition to the annual fee so you are definitely better off with Youinvest, assuming they have the funds you want.

    http://www.alliancetrustsavings.co.uk/forms-documents/fees-charges/Table-of-Charges.pdf

  • 117 The Accumulator November 8, 2014, 6:51 pm

    @ Andrew – if the JISA is likely to remain under £20K or so for a long time then take a look at:

    Charles Stanley Direct and Cavendish Online

    They charge a % of your total assets but no fund dealing fees. So if you had 10K in there you’d pay £25 and that’s it. That’s the way to go for small portfolios and monthly contributions.

    Comparison table here, but you’ll need to go to the individual sites to compare JISAs: http://monevator.com/compare-uk-cheapest-online-brokers/

  • 118 Optimist June 12, 2015, 11:26 am

    I am interested in knowing the current best place to put a vanguard life strategy 60-40 accummalator – or two as my wife and I will be investing the equity from a house sale in this way.

    I appreciate the above article as it explains how to buy one through a platform, but are the fees now out of date since the article is from 2012?

    We will have £60,000 (not enough to put direct with vanguard) but we want to put it somewhere and forget about it for at least ten years.

    Thanks in advance for any replies.

  • 119 The Investor June 12, 2015, 12:02 pm

    @Optimist — Hi, you might want to have a look at our fee comparison table:

    http://monevator.com/compare-uk-cheapest-online-brokers/

  • 120 Lawman December 21, 2015, 1:48 pm

    Platform charges: Hargreaves Lansdown.

    HL charges 0.45%:

    (1) for OEICs without limit

    (2) for others, including ETFs, subject to a maximum of £200 for a SIPP and £45 for an ISA.

    It follows that if you hold shares, bonds, ETFs, etc worth over £44,444 (SIPP) or £10,000 (ISA) then there is no charge on the other excess.

    For this reason I use ETFs for index trackers. Regrettably I can not use Vanguard funds as they would cost me an extra 0.45% p.a.

  • 121 Aikaterini Aspridi April 16, 2017, 10:44 pm

    I am a UK resident with a UK bank account, can I invest in Vanguard’s VTSAX, VTIAX & Total Bond market Fund? Any DIY platforms offering these choices?

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