What caught my eye this week.
Vanguard cut the fees on seven of its bond ETFs this week. For the full list see the table below.
I got a heads-up on this fee-flailing from a thoughtful Monevator reader. They speculated that perhaps the price cuts were needed to gee up enthusiasm for bonds after the big crash of 2022.
Given the scorn that some Monevator commenters heap upon bonds nowadays, I can see where this thinking comes from. But I don’t believe it’s right.
In fact money has been pouring into bonds recently.
UK bond funds recorded net inflows of £57bn in 2024, after two years of outflows.
Also many cash-rich private investors have also been buying short-dated gilts for the tax benefits. We explained why and how in a member post in November.
So why the disconnect?
Once bitten by bonds
I believe that many thoughtful and engaged passive investors were a bit blindsided by the bond rout as interest rates soared a few years ago.
These investors had commendably educated themselves about the benefits of a diversified portfolio.
But they’d taken away an over-simplified mantra that ‘bonds are safe’, and skipped the small print.
In fact, bonds at near-zero yields were primed for likely poor returns. The unpredictable thing was the bad returns came all at once. Instead of a slow bleed for a decade, balanced portfolios lost an artery.
Thus investors who’d put their money into, say, a 60/40 portfolio believing they were doing the responsible thing were blindsided when owning bonds made things even worse in 2022. Not such much a buffer as melting butter.
It might have gone differently. There are timelines were equities crashed and instead of inflation we got deflation. For instance: if governments and central banks hadn’t flooded the system with liquidity to fight the pandemic in 2020. In that case, think 1930s lost decade-style returns for equities.
True, you probably still wouldn’t have seen good returns from bonds – that’s maths – but annualised small losses from bonds may have buffered huge declines in the stock market.
Bonds are back
Today’s expected returns for bonds are much healthier anyway.
The yield-to-maturity on a ten-year gilt is 4.5%. Lend the government money for three decades and a 30-year gilt will pay you 5.2% annualised for doing so.
Of course you have to account for inflation, but in theory that should be around 2%. If you’re not convinced that will hold then an index-linked gilt of the same duration will deliver a 2% real return, if held to maturity.
Lower fees please
Vanguard’s fee cuts are small in that they’re of hundredths of a basis point – but chunky percentage-wise:
Source: Vanguard Investor
What’s ironic is that these fee cuts have come when the expected returns from bonds are much higher.
Even ten basis points of fees made barely-there returns even worse when fixed income was brain-numbingly expensive back in 2020.
But with expected annual returns from UK bonds in the 4-5.5% range, smaller fees are gilding the lily.
Finally – just to reassure the strangely persistent Vanguard conspiracy theorists out there – no Vanguard didn’t pay for this post. It didn’t even alert us about the price cuts.
And yes other good ETF providers are available.
I just thought the move was worth highlighting given Vanguard’s size and all the ongoing confusion about the asset class.
Also, it’s a great demonstration that even very cheap funds can get cheaper.
Have a great weekend.
p.s. If you’ve ever been a fan of Formula One racing then you need to see F1: The Movie on a big screen. It’s Top Gun: Maverick on wheels and a nostalgic blast from the past!
From Monevator
Profiting from the UK stock market liquidation – Monevator [Mogul Members]
Trump’s ‘revenge tax’ and your US investments – Monevator
From the archive-ator: What to expect from commercial property – Monevator
News
Starmer’s benefits U-turns will cost £4.5bn, warns think tank – Independent
Number of higher-rate UK taxpayers expected to breach 7m this year – Guardian
Workers on-track for a ‘lost decade’ of stagnant earnings – Resolution Foundation
JP Morgan turns bullish on British bonds – This Is Money
UK set to ‘lose more millionaires’ than any other country… – City AM
…while new map shows where Britain’s population will grow by 2032… – Yahoo
…with 300,000 middle-earners priced out of Inner London by 2035 – Standard
Edinburgh GDP-per-head surpasses London for the first time – Edinburgh News
Gates close for private equity buying British companies cheap – This Is Money
European countries ranked by average family income [Infographic] – Visual Capitalist
Russia’s economy is down but not out – BBC
The US has bounced back into the danger zone (decile 1 in this chart) – Charlie Bilello
Tough jobs market mini-special
UK graduates enduring worst jobs market since 2018, says Indeed – Guardian
Young people face a hiring crisis. AI isn’t helping – The Atlantic
UK jobs market is among worst I’ve ever seen, says Reed CEO – City AM
Big Four slash graduate jobs as AI takes on entry-level work – City AM
Government launches £54m fund to attract top researchers and innovators – GOV.UK
Young professionals swamped by ‘infinite workdays’ – Guardian
Economic inactivity is falling, but there’s more to be done – Economics UK
Products and services
Zopa enters current account market with cashback and 7.1% savings interest – Standard
Retirees risk losing thousands by not shopping around for annuities – Which
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this link. Terms apply – Charles Stanley
Premium Bond prize fund rate will be cut from August – P.A. via Yahoo
eSims for traveling abroad: how much can you save? – Be Clever With Your Cash
Get up to £100 as a welcome bonus when you open a new account with InvestEngine via our link. (Minimum deposit of £100, T&Cs apply. Capital at risk) – InvestEngine
10 ways wedding guests can save money in 2025 – Which
Got your Monevator mug? – Monevator shop
Mortgages and property mini-special
Nationwide changes rules to allow first-time buys with a 5% deposit – T.I.M.
FCA revisits rules on interest-only mortgages – Guardian
Average two-year BTL rates below 5% for first time since 2022 – T.I.M.
Ten hotspots for million pound properties – Rightmove
Rules protecting homeowners from repossession may be scrapped – Guardian
Homes for sale in harbour towns and villages, in pictures – Guardian
Comment and opinion
Are UK workers over-taxed? Three infographics – Tax Policy Associates
Happiness and money – Humble Dollar
The rollercoaster ride of Britain’s financial markets [Paywall] – FT
Allan Roth: lessons on money and life learned from Warren Buffett – Advisor Perspectives
What’s better than US bonds for downside protection? – Of Dollars and Data
Being human means being a bad investor – Behavioural Investment
A 2025 perspective on active management’s persistent failure – Wealth Management
Investing in inflation-linked government bonds [US but relevant] – Morningstar
If IHT rules come in, there will be a ‘sea change’ in retirement portfolios – FT Adviser
Naughty corner: Active antics
Investment trust numbers down 17% as ‘takeover frenzy’ continues – Trustnet
Swapping a rental property for a share portfolio – Fire V London
Cliff Asness of AQR on quant investing and more [Podcast] – Money Stuff
The King of Spacs is back [Paywall] – FT
Private markets are eating the world – The Irrelevant Investor
Bitcoin company goes from £4m to £1bn in two months [Um…] – This Is Money
Are stablecoins money? [Paywall] – FT
Kindle book bargains
How to Own the World by Andrew Craig – £0.99 on Kindle
The Algebra of Wealth by Scott Galloway – £0.99 on Kindle
The Big Short by Michael Lewis – £0.99 on Kindle
Skunk Works: A Memoir of My Years at Lockheed by Ben Rich – £0.99 on Kindle
Environmental factors
Green investing with a vengeance – Klement on Investing
The next financial crisis could start with the climate [Paywall] – FT
What do floating solar panels mean for wildlife? – Grist
Plastic bag bans and fees curb shoreline litter, study suggests – BBC
Extinction crisis could see 500 bird species disappear within a century… – Guardian
…and it’s looking bad for coral reefs, too – Guardian
No meat mini-special
Why there’s a growing backlash against plant-based diets – The Conversation
Vegan, but you don’t try to convert others? You’ve a high EQ – VegOut
Robot overlord roundup
Is talking to ChatGPT about personal finance ever a good idea? – White Coat Investor
Can AI speak the language Japan tried to kill? – BBC
Recalculating the costs and benefits of Gen AI – Harvard Business Review
Checking in on AI and the Big Five – Stratechery
Judge rules Anthropic training on books it purchased was ‘fair use’ – Sherwood
How AI models remember, not predict, financial data – Larry Swedroe
Not at the dinner table
How Britain’s new political divide delivers votes to Reform and the Greens – The Conversation
The neocons a generation on [Paywall] – Financial Times
Attention and speculation are now primary economic drivers – Kyla Scanlon
In the US, the expectation of political violence is becoming endemic – The New Yorker
Off our beat
Science says these five simple tests can predict how long you will live – Inc
The business of betting on catastrophe – MIT Press
Elio sees Pixar peter out… – Spyglass
…with its woes emblematic of bigger problems for Hollywood – CNBC
The afterlife of our online accounts – Six Colours
Prescribe weight-loss drugs first, say top cardiologists – Fortune
Inside Hollywood’s $200m bet on Formula One – Huddle Up
The UK’s best seaside towns, ranked – Which
And finally…
“What was generally described as a ‘financial crisis’ a decade or so ago was just part of a huge structural change in how the world’s economy works. This is not some temporary cyclical blip; it is not just part of a normal business cycle. Things are not going to return to ‘normal’ and the economy is not going to ‘recover’, at least not to the way it was between 1945 and 2007.”
– Andrew Craig, How To Own The World
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Thanks TI, I see Vanguard also launched two new bond fund/ETFs on their own platform: a short-term gilt fund and a global government bond ETF. Good to see them offering more options, especially on gilt duration.
https://www.vanguard.co.uk/professional/insights/new-short-term-gilts-fund-completes-our-uk-bond-exposures-line-up
@tetromino — Cheers, the short-term gilt fund is a welcome addition, be good to see some duration data though as I can’t see any in the factsheet. (Obviously very early days, but we need to see what we’re buying 🙂 )
DOI, I find crypto more cringe than David Brent’s dance routine in The Office, but I’m still waiting to see a use case for crypto other than fraud, crime or speculation. Yes, Trump and his cronies are doing their best to get a piece of the action through their own pump and dumps, but the investment case is non existent, and we still have the horrific waste of energy involved. If crypto does anything worthwhile in my lifetime I’ll eat my hat, but I just can’t see it happening.
#3 @marc148513: TIMs’ piece in the links above about The Smarter Web Company IPO. Looks like 80 mn shares @2.5 p each in April now trading @£2.38 (down from £5). 1000s% premium to BTC holding NAV! (ROFLMAO to that 😉 ) Crypto might be a rolling Ponzi du jour show, but what a way to transfer wealth from the gullible/late to the early/quick. And yet people wonder why Millennials and Gen Z aren’t interested in bonds on 4% p.a. If you were in their place, with the ‘toughest job market’ for newbies in memory, and facing high rents/deposits, wouldn’t you do the same if roles were reversed?
The Accumulator has made a good case here that linker funds are flawed, and that one is better off with individual linkers instead. I’ve come to the conclusion that the same applies to *all* bond funds (except short duration ones). The explanation was in one of the Weekend Reading links a few weeks ago. The fund structure amplifies duration risk. Funds can suffer a capital loss for much longer than their maturity suggests, during prolonged periods of rising interest rates. Rising rates are often bad for stocks too, stocks being long-duration assets, so this is a problem for diversification.
The effect may explain some of the 60/40 losses in 2022. The bigger factor was of course that bonds were just abysmal value and guaranteed to deliver a real loss.