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Vanguard launches dirt cheap ETFs for the UK

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)
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:

  • 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.

Vanguard lure investors with low cost ETFs

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

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{ 53 comments… add one }
  • 50 The Accumulator July 26, 2012, 5:06 pm

    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.

  • 51 AutomatedTrader August 21, 2012, 5:05 pm

    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

  • 52 AP November 26, 2013, 11:44 pm

    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.

  • 53 The Accumulator November 27, 2013, 3:10 pm

    @ 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.

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