The financial cage-rattlers at Vanguard [1] 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 [2].
The initial line-up of five funds will immediately go to the top of the ETF best buy rankings (by TER [3]), 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 [4], namely:
- Physical replication of indices. These are not synthetic ETFs [5].
- 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 [6].
The new Vanguard trackers should be available on pretty much every platform [7] 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.
[8]
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 [9] – 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 [10] 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 [11] 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 [12] 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 [13] 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 [14] 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