The Vanguard tracker offers rock-bottom charges -- but confusion abounds.
Here at the Fool, we're big fans of index trackers. But for years, the tracker products that are most favoured by our American colleagues -- low-cost trackers from Vanguard -- weren't available to us here in the UK.
In short, Vanguard -- founded by investing legend John Bogle in 1975 -- stuck to its American roots, where today it is an industry giant, with total assets of nearly $2 trillion.
But that all changed in 2009, when Vanguard announced it was setting up in here in the UK. True to form, it stormed into the UK market offering index trackers with a Total Expense Ratio (TER) of just 0.15% -- a cost equivalent to a tenth of some of those on the market, and less than half that charged by the firm's nearest competitor.
No wonder, then, that two years later, Vanguard's UK operation was able to point to having some £2 billion in funds under management -- a whopping success in anyone's book. And some of that money, I'm happy to say, belongs to yours truly.
That said, Vanguard's approach to the UK market has been somewhat low-key. Initially, for instance, it marketed itself chiefly to financial advisers seeking index trackers for their clients -- and this market is still an important one.
Barriers to wealth
As a result, several myths have arisen -- myths that often crop up when I and others write about Vanguard products here on the Fool.
Last week's article on the cheapest index trackers, for instance, saw a couple of old chestnuts aired again in readers' comments, even though we writers routinely try to de-bunk them.
And because these myths serve to act as a barrier to one of the best investing options out there, it's worth having a crack at dispelling them once and for all.
Here, then, is the real low-down on Vanguard trackers.
Myth 1: You need to invest £100,000
No you don't, quite simply. £100,000 is the minimum amount required if you want to hand over your dosh to Vanguard directly.
As Vanguard's Peter Robertson pointed out when I spoke to him shortly after the launch, setting up a retail platform is an expensive proposition. Consequently, the business prefers to go through intermediaries to reach retail investors.
If you have £100,000, great, then Vanguard will take your money. But for any lesser amount, you'll need to go to a fund platform.
At which point, we encounter myth 2.
Myth 2: Fund platforms don't carry Vanguard products
Oh yes they do -- but perhaps not the fund platforms that many readers routinely use.
Because of its firm policy of not paying commission to fund platforms, most platforms have thus far denied Vanguard access to their clients.
You'll look for Vanguard's low-cost trackers in vain, for instance, on platforms such as those of Hargreaves Lansdown (LSE: HL) and Fidelity, even though these firms are normally those where you would expect to find investor-friendly retail products.
On the Hargreaves Lansdown platform, for instance, the cheapest trackers on offer are those from HSBC (LSE: HSBA), which have a TER of 0.27%. That's still a cracking good buy, of course, but not quite at Vanguard rock-bottom rates.
On Fidelity's FundsNetwork, meanwhile, the cheapest is Fidelity's own Fidelity Moneybuilder UK Index tracker, on a TER of 0.3%. Again, good value, and cheaper than most on the market, but not as cheap as Vanguard.
In fact, at the moment -- because, as stated, Vanguard doesn't pay commission -- just three platforms carry Vanguard's products: Alliance Trust Savings, Sippdeal and Bestinvest.
Which is best? That depends on your circumstances, how much you want to invest, and how often. Simply put, you'll need to carefully study the charging structures -- although blogger Monevator has done some of the digging for you.
Myth 3: Vanguard charges an upfront fee on UK trackers
Oh no it doesn't -- although it might look that way.
As I've explained before -- and again, in article comments -- the 0.5% that Vanguard levies on initial purchases is a tax: Stamp Duty Reserve Tax (SDRT), imposed by Her Majesty's Revenue and Customs (HMRC). And the money that Vanguard collects from you is duly handed over to HMRC, not retained.
SDRT is payable whenever UK stocks are bought, and whenever the shares of a fund investing in UK stocks are redeemed and subsequently re‑issued. On the individual share purchases that we make as investors we pay it, and trackers are no different.
What is different about what Vanguard is doing is that every other provider ‘absorbs' SDRT, including it within their tracking error -- and in so doing, penalises long-term buy-and-hold investors at the expense of short-term tracker traders.
In short, when you buy a Vanguard UK tracker intending to hold for the long-term, you pay SDRT -- but only once, at the time of purchase. Thereafter, you get a rock-bottom TER, and an industry-beating tracking error.
On the flipside, precisely because it makes the SDRT charge explicit, Vanguard trackers aren't for short-term holders. A 0.5% SDRT charge and a 0.15% TER add up to 0.65% -- more than twice HSBC's 0.25% and Fidelity's 0.3%.
Foolish bottom line
So there: three Vanguard tracker myths debunked. More questions? There's further information on the Vanguard website, or on our new Vanguard discussion board. Or ask in the box below!
More from Malcolm Wheatley:
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> Malcolm owns tracker products from Vanguard and HSBC, and holds investments with Hargreaves Lansdown and Alliance Trust Savings.