The financial cage-rattlers at Vanguard have announced the launch of their first London-listed Exchange Traded Funds (ETFs), in a move that should bring significant long-term benefits to Brit-based passive investors.
The initial line-up of five funds will immediately go to the top of the ETF best buy rankings (by TER), either beating or matching their rival offerings straight off the bat.
Vanguard has confirmed the following five ETFs are ready for launch:
| Vanguard ETF | TER (%) | LSE Ticker (GBP) |
| FTSE 100 ETF | 0.1 | VUKE |
| S&P 500 ETF | 0.09 | VUSA |
| FTSE All-World ETF | 0.25 | VWRL |
| FTSE Emerging Markets ETF | 0.45 | VFEM |
| UK Government Bond ETF | 0.12 | VGOV |
Reports suggest the new ETFs will go live on Wednesday, 23rd May.
The new Vanguard ETFs benefit from a number of key features, namely:
- Physical replication of indices. These are not synthetic ETFs.
- The new ETFs follow broad-based indices, so all are suitable pillars of a diversified portfolio. None of your leveraged Albanian Pilchard Farmers rubbish here.
- They’re Irish domiciled, so you skip stamp duty.
Previously, Vanguard’s UK index fund range has been restricted to a handful of platforms. And because of the different fee menus, working out your best option has been a special kind of torture.
The new Vanguard trackers should be available on pretty much every platform that deals in ETFs, so UK investors won’t be forced into the hands of a measly few providers.
Vanguard ETF or index fund?
Some may be disappointed that the new ETFs are largely clones of existing index funds, but the cheap TERs are worth the entry price alone.
Bear in mind though that in order to buy ETFs you must pay:
- Brokerage commissions – roughly £10 per trade, although you can cut this to £1.50 by using a regular investment scheme (the same price you’d pay for Vanguard index funds through Alliance Trust).
- The bid-offer spread – should be pennies, but spreads can take a while to settle down as a new product finds its level. Ideally holster your trigger finger for a few months to enable the spreads to tighten.
In my view, bearing in mind the above there’s no reason not to switch to the Vanguard ETFs in place of its index funds. If lower TERs are available, you might as well scoop them up.
If you usually buy, say, HSBC or L&G index funds to avoid brokerage commissions, the calculation is more finely balanced. Try a fund cost comparison calculator to weigh up your options.
Depending on how much you invest, it may not take very long for a cheap ETF to pay off. The Vanguard Emerging Markets ETF will edge the L&G Global Emerging Markets index fund after just four years, for example, even if you pay upfront trading costs of 1%.
The best versus the rest
As for ETFs, here’s how Vanguard compares to its rivals in a straight ETF vs ETF TER tear-up:
| Vanguard ETF | TER (%) Vs |
TER (%) | Rival ETF |
| FTSE 100 | 0.1 | 0.2 | Source FTSE 100 |
| S&P 500 | 0.09 | 0.09 | HSBC S&P 500 |
| FTSE All-World | 0.25 | 0.5 | SPDR MSCI ACWI |
| FTSE Emerging Markets | 0.45 | 0.45 | Amundi MSCI Emerging Markets |
| UK Government Bond | 0.12 | 0.15 | SPDR Barclays Capital UK Gilt |
Note: The Source and Amundi ETFs involve synthetic replication.
Clearly, Vanguard has found plenty of room for price-cuts. It will be interesting to see how their rivals respond.
A new option for global investors?
Just to get away from TERs for a second, it’s also worth mentioning that the Vanguard FTSE All-World ETF looks to be an entirely new beast from the Vanguard stable.
The FTSE All-World index tracks 90-95% of the world’s investible equities across both developed and emerging markets. So this is pretty much a one-stop-shop ETF for anyone who wants to run a global portfolio.
Team it up with a broad-based gilt fund and you’ve got a diversified portfolio in just two steps.
Price war
When Vanguard first stormed the UK index fund market, it forced major price slashery from rivals who’d been using bloated TERs to leech investors for years.
Vanguard’s strategy from birth has been to screw down prices, and now it is one of the largest asset management firms in the world.
No doubt it will make more of its range available as ETFs, and continue to up the price pressure on its rivals. UK investors will be the ones who benefit.
Take it steady,
The Accumulator
Comments on this entry are closed.
That All-World ETF rocks – perhaps there’s a way of avoiding the byzantine maze of fund platform kickbacks etc, at the cost of lumping one’s purchases each year. I really like that one.
> and now it is one of the largest asset management firms in the world.
The only fly in the ointment. That fact alone scares the bejeesus out of me. Huge financial firms tend to suffer huge financial insider scams every so often. Power corrupts, and all that…
> “switch to the Vanguard ETFs in place of its index funds”
Can somebody clarify the difference for me? A decent link would be fine, as I realise it’s a bit off-topic here.
Hi Simon — Sure, here is a one-stop shop to the main differences.
For more detail, this multi-part post goes into each of the main aspects of ETFs versus index funds.
@ermine — You don’t get a tiny TER without enormous scale, I suspect.
Will these have a larger tracking error due to the lack of the up front fees of the trackers?
I wonder if holding a collection of the new Vanguard ETF’s will prove cheaper than holding the Vanguard Lifestrategy fund. Of course, there would be a loss of automatic rebalancing but may be worth it for a small saving in TER. Time to get my spreadsheet out I think…
1. We’ve had to wait long enough. I emailed Vanguard (UK) in December 2010 to find out whether it’d be launching ETFs here – and if so, when. It said it intended to do so, in the second half of 2011.
2. You say: “When Vanguard first stormed the UK index fund market, it forced major price slashery from rivals who’d been using bloated TERs to leech investors for years.” I think you mean some rivals: a certain company associated with a publicity-shy man [he has a beard] continues to fleece its customers for its FTSE All-Share tracker, for example. Legal & General hasn’t cut fees on its trackers, either. HSBC did, of course.
3. It’ll be interesting to see the response, if any, from iShares (UK) – not least given the fierce competition between Vanguard and iShares in the US. What do you think?
@ Gadgetmind – not entirely sure what you mean, but I don’t see any reason to think they’ll have a large tracking error. You can always look at the ETF and index fund versions in the US for a comparison.
@ Alex – apparently it took them longer than they hoped to get through the regulators. I agree, iShares is the interesting one. However, iShares has already been undercut on a number of fronts and yet still possess some of the largest ETFs on the market – buffered by their brand equity. So they may not need to respond for a while. However, I can picture Vanguard being a bigger threat, given it also has a powerful brand and uses a physical replication strategy.
Intriguingly the 0% TER db x-tracker Euro Stoxx 50 ETF is far from being the biggest Euro Stoxx ETF, so low TER is not the be all and end all.
With any luck Vanguard will over zero commission trades on their ETFs in the fullness of time, just like they do in the US.
@accumulator – “@ Gadgetmind – not entirely sure what you mean”
The Vanguard trackers have an up-front fee (dilution levy?) that covers trading costs and stamp duty. It varies from tracker to tracker, and tends to be highest for UK-heavy ones, presumably to cover stamp duty. As a result, the fees are up front rather than ongoing as in other trackers.
LTBH peeps such as ourselves like this. A lot.
If these ETFs instead have such fees as ongoing tracking error (where else can it go?) then long term holders are subsidising the fly-by-night in-and-out merchants.
We don’t like this. Not a little bit.
I suspect that this isn’t a problem, otherwise why would Vanguard not replicate the practice they’ve already established with their index funds?
Re: Stamp Duty, I have to say this was my first thought when I saw the super low TER of 0.1% for the FTSE 100 ETF. Given stamp duty is 0.5%, there’s a lot of something missing there, although of course even the iShares FTSE 100 ETF (ISF) has a TER of less than 0.5%.
I recalled Vanguard pulling it out seperately for the index funds, too. Indeed you can see it being listed on this Vanguard Page under ‘additional costs’ for its index funds.
Perhaps it’s just taking it on the chin as a loss leader for the ETFs? I am trying to think if I’m missing something obvious, but I don’t think so. Even if Vanguard is confident the ETF will continually swell in size (so it doesn’t need to keep selling and repurchasing underlying holdings, churning and repeatedly paying stamp duty) there will still be new additions to the index, and re-jiggings to consider. There will be some amortization, but enough?
That said, I am entirely sure T.A. is correct that it won’t be a problem. I’m sure Vanguard hasn’t spent decades building up its reputation as the tracker house par excellence only to go bananas in the Old Country. 🙂
The Vanguard website has been updated to reflect these new ETFs:
https://www.vanguard.co.uk/uk/mvc/investments/etf#fundstab
Are there any issues around the base currency of some of these funds being in USD rather than GBP?
I don’t think the FTSE All World index offers you much emerging market company exposure – its really just a developed stock market tracker
The US weighting is something like half, Europe is another 30% or so with Japan being about 10%
Its just a function that a lot of emerging market companies are private
The new ETF’s may have a lower TER but they are all distribution flavour as opposed to accumulation flavour – hence for long term passive investors they may turn out to be more expense once you factor in the dealing charges required for quarterly dividend reinvestment v’s no charges for accumulation index funds.
Another thought re the new Vanguard ETF’s – you say in another article that given the choice between an ETF and Index Fund you would still choose the latter (TER’s being similar). It seems to me that the ETF’s avoid the extra stamp duty incurred on some Index Funds but the Index Funds are tried and tested and have been around since the 70’s – I am still inclined to choose the Index Funds unless I can’t find what I want in which case it will have to be an ETF. Any views?
@EP
I’m pretty sure the Vanguard ETF fees are lower than the unit trusts
UK: 0.1% vs 0.15% annual plus 0.5% stamp duty
FTSE All world: 0.25% vs 0.3% annual
US: 0.09% vs 0.2% annual
(I didn’t bother to look at the other two must confess)
The indexes are just very slightly different:
UK – ETF tracks the FTSE100, unit trust tracks the FTSE all share
World; ETF tracks the whole index, unit trust tracks the world ex-UK
US; ETF tracks S&P 500, unit trust tracks the S&P all share
Really the differences between the index in each category will be minor so you might as well go with the ETF
Personally I won’t bother switching because I like having accumilation units, a 0.05% annual charge difference is only £50 a year on £100k fund and… I’m very lazy
Thanks Neverland for your comment. See my post No 13 above, I agree re benefit of accumulation units in Vanguard unit trust index funds and am thus leaning towards them.
@ Neverland – the All-World index is about 10% Emerging Markets, which seems about right to me. If you want more Emerging Market exposure then it’s a simple matter to add an Emerging Market fund to your portfolio.
@ EP – I just add the divis to my next trade, so it doesn’t make much difference. I would still choose index funds over ETFs, all things being equal. However, I don’t have a problem buying ETFs – I own physical and synthetic varieties. In this instance, I’m particularly tempted by the Emerging Markets ETF, though I’m going to give it a while to let things settle down.
@ Bigsy – the issue is currency risk – the chance that the pound appreciates against the dollar and thus reduces the value of your holdings denominated in greenbacks. It tends to be swings and roundabouts over time though, and you can’t avoid it if you want certain types of funds e.g. emerging markets. Occasionally you’ll come across an international fund that seems to be in £ only to discover that the base currency is $.
@Accumulator
You need to think about what you are tracking; if you really want to track “the world” you need a much bigger than 10% EM exposure
At nominal prices emerging markets are about a third of the world’s GDP; at PPP its about half (try here: http://www.imf.org/external/data.htm)
10% exposure and some random American and European headquartered multinationals just isn’t the same thing
@Neverland — I get the thrust of what you’re saying, but I’d retort why do you want to track ‘the world’. Much of world GDP consists of people growing rice inefficiently and repairing their huts. Even in emerging markets, swathes of industry is state-owned, and what isn’t is subject to all sorts of potential punitive raids / excess taxation / confiscation / wage demands / land grabs etc.
The name of the game in capitalism has never been about tithing off 1% of world GDP. It’s always been about buying a proportion of the income due to privately-owned, well-managed companies adding value in economies that recognise the rule of law. I don’t feel your comment “some random American and European headquartered multinationals” really gives them their due. 😉
@Investor
Go back and have a look at the GDP growth predictions in the IMF data I linked and you will see why I’m quite keen to track the so-called emerging economies
GDP in 2000 (actual USD bn)
China 1,198bn
India 476bn
UK 1,480bn
GDP in 2010 (actual USD bn)
China 5,930bn
India 1,597bn
UK 2,263bn
GDP in 2017 forecast (actual USD bn)
China 12,714bn
India 2,906bn
UK 3,168 bn
As for: “Much of world GDP consists of people growing rice inefficiently and repairing their huts.” I find that amusing. Chinese bureaucrats probably made much the same comments about Europe in the 14th century…
@ Neverland
Chinese GDP may well have gone up 6 times in a decade but that doesn’t mean its stock market has. Have you found a way to capture GDP growth?
http://www.tradingeconomics.com/china/stock-market
@Neverland — I know all about GDP growth in those economies, thanks. 🙂
You might want to read the research on how investing in high GDP growth does not lead to higher returns. In fact, from memory it was the other way around. This is for various reasons, including the fact that faster growing economies fail to reward shareholders like slower established Western ones (more of the gains go to wage growth, government grabs, etc).
It’s mainly because everyone and their dog can see when an economy is growing fast, though, which means that the markets are more expensive on a risk/reward basis. So even if the growth does help indigenous companies, they were too expensive to begin with.
In contrast the US in 2008 and 2009, emerging markets at the end of the 1990s, or, perhaps, Europe now were/are better buys on valuation grounds.
I mean to write a post on the poor link between GDP and returns, but I haven’t got around to it. This Economist article covers one piece of the research, however.
@Investor
Overpaying for “growth companies” is hardly confined to emerging economies is it?
e.g. Facebook, Blackstone, Bumi etc.
The article you link to to from the Economist states that returns are really just compounded future dividends, fair enough, lets see where we start out. From the FT:
Gross yield on FTSE all world developed: 3.0%
Gross yield on FTSE all world emerging: 3.5%
You say: “You might want to read the research on how investing in high GDP growth does not lead to higher returns. In fact, from memory it was the other way around.”
I believe returns from Japanese equities over the last few years have not been very good either for local investors?
http://www.tradingeconomics.com/japan/stock-market
Ps. Isn’t The Economist the same mag that has been predicting London house prices will crash for the last decade? 😀
@ AshG
Alas no its not six times is it?
In Jan 2005 you could buy 15.5 Renimbi for a £; now its 10
Still add in the currency appreciation and its still a lot better than the UK maket over the same period:
http://www.tradingeconomics.com/united-kingdom/stock-market
(I have no way of comparing including dividends which is the important one)
Alliance Trust do not yet have them on their website.
If the Vanguard ETFs are Irish domiciled does that mean they are outwith the FSCS ?
re your comments on stamp duty ‘irish domiciled so you skip stamp duty’- think you will find that most or all London listed ETFs are exempt from stamp duty (just as well as Irish cos usually have 1% rather than 0.5% stamp)
@Neverland — Well, you pays your money and takes your choice. 🙂
I’ve cited the research for you that shows that the link between high GDP and investor returns is poor. It’s completely irrelevant whether people pay more for growth shares, too. It’s still flawed strategy.
That isn’t to say you won’t make money by over-weighting emerging markets right now. You might, and I hope you do. It’s just to say your reasoning is wrong.
The standard passive approach is to try to mirror world output. If you deviate from that, you’re taking an active approach. The evidence says your proposed active approach — overweight the glory regions that everyone has piled into for the past ten years — will lead to poorer returns. You are investing on a fallacy, IMHO. Of course, it’s your choice what you do with that information, and I wish you luck.
As for Japan, I’m afraid that too just underlines my point. The Japanese stock market was trading at sky high multiples in 1989 — something like 60x from memory. That’s a big reason why returns have been so poor since then.
The GDP/returns research is cited by The Economist, but it’s not their research. I agree I wouldn’t give them £100 of my money to run. (I still remember the $10 oil forever Economist cover of the late 1990s! 🙂 ).
A general query on ETF’s. If you have a FTSE listed ETF where the native currency is USD but the ETF can be purchased denominated in either USD or GBP (example HPRD or HPRO) which for a UK investor is preferable and why? To my simple mind I assume the only difference which may affect returns is currency risk and GBP would be best?
@ Neverland – the size of private capital distorts our view of every market – Germany being obviously underrepresented, and publicly traded companies only represent half the market in the US. If you’re brave enough to go 30-50% in emerging markets then good luck to you. That’s too risky for my blood. I’d question though, how investing 3-5 times more in the same EM public companies actually helps diversify a portfolio to reflect the realm of private capital. There’s a piece here by Rick Ferri with a few thoughts on how to do it: http://www.forbes.com/sites/rickferri/2012/02/27/the-total-economy-portfolio/
Also, you lucky sausage, here’s a paper on the negative correlation of economic growth and returns: http://bear.warrington.ufl.edu/ritter/PBFJ2005.pdf
@ Steve – Some slight confusion here. Virtually all London-listed ETFs are domiciled in Ireland, Luxembourg or France. If they were based in the UK then they would pay stamp duty on the purchase of shares abroad. If they’re headquartered overseas then they’re exempt. As it is, only funds that purchase UK shares pay stamp duty – regardless of domicile. Individual investors don’t pay stamp duty when they buy ETF ‘shares’ and you’re right that domicile isn’t a factor here. The Irish don’t levy stamp duty on funds purchased by foreign investors. As you can tell, I get invited to all the parties.
@ Donny – I think it’s ok as the FSCS covers FSA regulated financial service providers i.e. your UK broker. Still, that’s not a definitive answer as I’d want to get forensic on the rules and regs before coming to a firm conclusion on that one. Let us know if come to any firm conclusions.
@ EP – it doesn’t make any difference. If the base currency is the almighty dollar then you’re still exposed to currency risk, regardless of whether or not they also market a user-friendly sterling version. The pound-based variety is just window-dressing.
@ Accumulator
You talk about a 30% investment of an equity portfolio in emerging markets being a lot
In fact you need to take a holistic view and consider that most people work in the UK, earn in £ and own homes in the UK, so having a massive exposure to the UK economy when the UK exports more to Ireland than it does to China
It basically means that their overall exposure to emerging markets, ends up many times smaller than the notional exposure of an equity portfolio
@ Investor
I’m confused you say a 30% allocation is overweighting emerging markets
Emerging markets are c. 30% of GDP in nominal USD in 2010 according to the IMF
At purchasing power parity the IMF say that emerging markets are about half of world GDP in 2010
How is trying to get a 30% emerging markets allocation overweighting emerging markets?
You say: “The standard passive approach is to try to mirror world output.”
My original point was simply this: the FTSE All World index bears little resemblance to world output, but merely to a country’s preferences to quote its major companies on a stock exchange or not
@Neverland — I’ve said my piece now, but you haven’t engaged with this key issue of high GDP growth and stock market returns. Fair enough, good luck with your investment. (FWIW I don’t think emerging markets look as pricey as 12-18 months ago).
@Investor
Okay, lets go have a look at this 2004 piece of research: http://bear.warrington.ufl.edu/ritter/PBFJ2005.pdf
Mr Ritter says: “But although consumers and workers may benefit from economic growth, the owners of capital do not necessarily benefit.”
I disagree, the benefits of the last 20 years of economic growth throughout the US and the UK have gone disportionately to the richest part of the population. These people are the “owners of capital”. I can’t beat em so I’m going to join them
Mr Ritter says: “But I think that there is a general tendency
for markets to assign higher P /E and price-to-dividend multiples when economic growth is expected to be high, which has the effect of lowering realized returns because more capital must be committed by investors to receive the same dividends”
I say okay, so I think GDP grow in the emerging markets is going to be higher and so does everyone else, but do I have to pay for it? From Thomson Reteurs:
USA PE 14.6 Yield 2.2%
UK PE 9.8 Yield 3.8%
Japan PE 14.6 Yield 2.5%
France PE 11.4 Yield 4.2%
Brazil PE 11.2 Yield 3.9%
China PE 7.3 Yield 4.3%
India PE 16.1 Yield 1.7%
Russia PE 5.4 Yield 3.2%
Looks like a free ride to me, no premium for a good chance of a share of higher growth
Mr Ritter also says: “There is also an asymmetry—if a country has negative growth, this is probably bad for stocks.”
Yeah I agree with that and this is a high risk for the developed world. Every major Western European country and the USA needs to move, in the short to medium term, from increasing its public debt to moving into a budget surplus to pay down its debt as their population ages
In each of these countries the public sector is somewhere between 35% (USA) to 60% (France) of the economy. This will act as a massive drag on growth
Furthermore, several advanced economies, UK in the front, have excessive levels of private debt, so the consumers (most of the rest of the economy) have to do the same
Ugly, ugly, ugly
@Neverland — You are conflating two different points in your comments about the rich benefiting in developed economies. They do so precisely because we’re developed mature economies, with generally shareholder friendly cultures. In China, for instance, the huge returns from moving to a market system have largely gone on building cities and moving people from the countryside. That’s one reason for the lack of performance of Chinese stocks cited early (there are many others). In some EMs, there is punitive/windfall taxation. In Argentina, they are simply seizing assets.
As I said, I don’t think EMs look particularly expensive currently. And of course sometimes they do very well, and this may be a good starting point, or it may not. I do agree deleveraging is a challenge in the West, though there are several solutions that would be very bullish for developed world stocks (principally slightly higher inflation).
I was simply pointing to your claim that EMs were a good place to invest due to high GDP growth. There’s no evidence of that – the evidence says the opposite. I thought as I had this information then you as an EM market enthusiast who believed the opposite might like to know it. 🙂
If you think things are different this time / disagree with the research then fair enough. Equally, if you are now thinking (but not saying!) “Actually, I now appreciate that high GDP growth isn’t a reason to invest in EMs, but I see that low valuations are, and I believe that these are low valuations” then again, I have no problem with that principle.
I’m all for Monevator readers making money, and have no interest in changing anyone’s beliefs for the sake of it. As I keep saying, good luck to you 🙂
@ Investor
You say: “In China, for instance, the huge returns from moving to a market system have largely gone on building cities and moving people from the countryside.”
I quoted UK and US gini co-efficients because China hasn’t published its since 2005
However: “China’s Gini coefficient — and hence its wealth gap — has risen more than any other Asian economy in the last two decades, according to Murtaza Syed, the International Monetary Fund’s resident representative in Beijing, citing World Bank data. Syed told reporters in Beijing last month that the high wealth gap may hurt China’s long-term growth prospects.”
http://www.bloomberg.com/news/2012-03-09/china-s-gini-coefficient-exceeds-trigger-for-unrest-chongqing-s-bo-says.html
You would think she would know wouldn’t you?
The risk with emerging markets is that money goes to the insiders, not to the shareholders…but hang on, isn’t this exactly what has happened in boardrooms right across the Western World in the last decade?
You say “In some EMs, there is punitive/windfall taxation. In Argentina, they are simply seizing assets.”
I say: What is quantative easing exactly but stealth confiscation through financial repression? Has there never been punitive or windfall taxation in the UK?
@Neverland — The China inequality issue is a separate issue, caused by urbanisation/transition (legitimate and perhaps a price worth paying) and some of the very factors I’m talking about (cronyism etc), not by some bunch of shareholders making out like bandits. A previous poster has already pointed out to you that this hasn’t happened, as measured by returns from the Chinese stock market. If anything, this is more evidence that riches don’t flow through to investors, at least in China.
Money going to other economic stakeholders is not “exactly what has happened” in the West in the past decade. In emerging markets, public sector workers get richer through cronyism, and workers get far higher salaries as they stop being peasants, amongst other things. In the West, the P/E of the FTSE 100 has come down from around 30 to around 10, as profits have continued to flow through to shareholders, after deducting certain outliers like ridiculously high CEO pay (too high agreed, but immaterial in terms of shareholder returns) and the banking sector.
QE is an attempt to stave off a depression due to massive deleveraging and risk aversion, that you can call stealth confiscation if you like those words. It’s not the state setting out to deliberately syphon off gains. Yes there’s been windfall taxation in the UK before, but that is yet another straw man. It doesn’t negate the studies I and others have pointed you towards explaining that investing in EMs based on high growth expectations has been a losing strategy, which was the whole point of this debate.
I have money in emerging markets. I don’t have money in emerging markets based on an incorrect premise. Once I thought as you do, and now I don’t because someone or other pointed me towards the research. I’m sure I thanked them; I definitely didn’t make them regret it.
I’m afraid I’m bored of this now. I think we’ve both said our piece so let’s leave it there. 🙂
can someone explain all the charges on
Vanguard LifeStrategy 100% Equity Accum
then add them all up for total percentage
sorry if question is basic but i hate hidden charges or not knowing the full charges
thx
@ David – you can see the charges here: https://www.vanguard.co.uk/uk/mvc/investments/mutualfunds#fundstab
The TER is the amount you’ll pay on the total value of the fund per annum and the purchase fee is the amount you’ll pay on each contribution.
Bear in mind, you’ll buy the funds through a broker who may charge you a dealing fee every time you trade and/or an annual charge for holding the fund in your account.
Here’s some useful links:
http://monevator.com/2011/10/18/vanguard-lifestrategy/
http://monevator.com/2011/12/13/hargreaves-lansdown-vanguard-funds/
http://monevator.com/2011/06/21/how-to-choose-the-best-index-trackers-costs/
It is a big disappointment that all these Vanguard ETFs are distributing!
In the long run they are more expensive than a capitalizing ETF with a higher TER!
When you own a Vanguard ETF, you must keep reinvesting the dividends, which incurs trading and bid/ask spread expenses. And you must pay dividend tax in your home country in specific cases.
I cant believe why they cannot launch accumulating share classes!
I am sticking with the SPDR MSCI ACWI IMI ETF.
@Bence – I agree regards costs or re-investing, but even with accumulation funds the individual must track dividend income and capital gains for any “unwrapped” investments.
I tend to let dividends accumulate as cash and then address the issue every year or so when rebalancing.
I just reinvest my dividends when I make a new contribution to a fund (not necessarily the same one the divis come from). It doesn’t cost me anything extra. Comparatively few ETFs are capitalising / accumulating.
But not everyone can invest every year.
If you receive a lump sump and you cannot invest new money each year, then only the accumulating ETFs are suitable.
And what happens if you own a distributing ETF, but you cannot invest new money at times? It is not guaranteed that you will always have new money to invest. In this case you keep paying the unnecessary broker commissions and spreads just to reinvest dividends.
Thanks for the great articles on ETFs vs funds! I’m in the midst of transferring my ISA out of ATS and have to liquidate all my Vanguard funds =( I’ll like to jump straight back into Vanguard by replacing them with these ETFs, but I’ll like to know if there are any specific risks associated with ETFs?
I understand they can be illiquid and thus the bid spread might be higher but since I’m going to be holding them for a while I’m more concerned about long term costs. Is there a danger at all of not being able to sell the ETFs I’m holding because of lack of demand? Thanks!
@ Jess – ETFs can be illiquid if they’re underlying assets are illiquid. In other words, if they follow an obscure or thinly-traded index composed of assets that aren’t traded all that regularly then the ETF will generally exhibit the same characteristics. You can get an idea of trading volumes for London ETFs here: http://www.londonstockexchange.com/exchange/prices-and-markets/ETFs/ETFs.html
ETFs can also be affected by particular market events e.g. it was hard to trade some Japanese ETFs – and the spread went nuts – in the hours after the tsunami as the market couldn’t properly digest the impact of the event upon Japan.
You wouldn’t expect the Vanguard ETFs to be generally illiquid as they follow broad-market indices, but of course any vehicle can be affected by a massive market shock as per the tsunami example.
@ The Accumulator – Thanks very much for your answer! I think it sounds like the Vanguard ETFs would be a great investment. I’ve trawled their website though and could not find any information on the individual holdings in the ETFs, I was wondering if you might have come across this in your research? Thanks!
Jess, I’m not sure what you mean by individual holdings. Do you mean individual trades? If so, then that’s on the London Stock Exchange website. So you’d type the code of the ETF in the search box of the web page I linked to in my previous comment e.g. VUKE for the Vanguard FTSE 100 ETF, and then you’d be able to see specific trades for that day: http://www.londonstockexchange.com/exchange/prices-and-markets/ETFs/company-summary.html?fourWayKey=IE00B810Q511IEGBPETFS
@The Accumulator – Sorry, I was referring to the basket of stocks that the ETF is actually holding. But I think I just figured it out by clicking on the FTSE 100 fact sheet you linked to in the post. The prospectus on the Vanguard site doesn’t specify which companies are being held, so I have to look for information from the index itself? So I’m assuming for info on the Vanguard Emerging Markets ETF I should be looking at this: http://www.ftse.com/Indices/FTSE_Emerging_Markets/Downloads/AWALLE.pdf.
Thanks!
If you want an exact list of the companies held then I’d look in Vanguard’s interim or annual report (which they haven’t released yet for these ETFs). While the ETF physically replicates the FTSE Emerging Market index it won’t necessarily hold every company that composes the index – trading illiquid companies increases fund expense. That’s one of the reasons for tracking error.
The UK-listed Vanguard ETFs are good news – I bought a fair chunk for the company pension scheme (SSAS) I run. The snag is that I’d now like to buy some of their US-listed ETFs and simply cannot find a combination of a broker that will open an account for a SSAS AND that can provide access to the Vanguard US-listed ETFs. Any suggestions very gratefully received. Thx
Thanks for all the many great posts on your site. It really is one of the very best UK investing sites.
I was looking at the vanguard ETFs and I think they pass on the stamp duty to the ETF purchaser rather than include it in the ongoing charges – otherwise at 0.1% for the FTSE100 it is cheaper for 5 years than buying the shares! Can you confirm/deny/clarify? I think iShares are SD-free but charge a bit more TER.
@ AP – As far as I can tell they don’t levy an upfront stamp duty charge on their ETFs, though their is a very vague reference to it in one of their documents. Vanguard are very clear in the mutual fund section where you have to pay the 0.5% up front. They don’t list that charge for any of their ETFs.
Note, this charge would only be applicable on products that trade in UK equities.
You don’t pay stamp duty when you trade the ETF itself, as you would for shares. However, all fund managers will pay stamp duty on the underlying assets and they will pass that on to you one way or another. It’s not correct to say that iShares (or anyone else) are stamp duty free.
The initial charge is a more transparent way of registering the cost of stamp duty and means you pay for the costs of your own trades. Otherwise the costs of all your fellow investor’s stamp duty leaks out via tracking error, which is one of the cost of owning a tracker.
Hi Accumulator,
I’m sorry for this stupid question but I’m confused as to whether ETFs or index funds are the better option to go with in terms of costs and potential yield. In your previous articles you’ve noted that index funds are preferable to ETFs but here it seems to be the opposite? And I’ve noticed on financial indepence forums I’m part of that many investors prefer ETFs. Index funds generally incur no dealing costs whereas ETFs do, so surely index funds will always trump ETFs? I’m also confused by how ETFs are traded and limit orders, etc. Once you’ve purchased an ETF, will it be traded on your behalf throughout the day to get you the best value or does it simply follow the index until you decide to trade it yourself? A limit order suggests to me that there’s a degree of automation with ETFs but I think I’m misunderstanding.