Buying The FTSE Just Got Cheaper

Published in Investing on 16 May 2012

Vanguard launches a range of low-cost ETFs.

The message is simple: low-cost mutually owned fund management giant Vanguard has done it again.

Arriving in the UK in 2009 and upsetting a cosy marketplace of high-cost index trackers with its own ultra low-cost range, Vanguard has today followed up on this by launching five low-cost physically replicated exchange-traded funds (ETFs).

And, as the headline suggests, one of them tracks the FTSE 100, offering a total expense ratio (TER) of just 0.1%. As savvy investors know all too well, the name of the game in trackers and ETFs is to keep costs low -- and that TER of 0.1% is lower than any FTSE 100 tracker or ETF on the market.

It's also lower than all but one of the FTSE All-Share trackers on the market -- just matching the SWIP FTSE All-Share tracker offered exclusively to clients of Hargreaves Lansdown (LSE: HL).

In short, it's a buy.

The news gets better

But not quite yet, it seems: the final pieces of paperwork are still going through the Financial Services Authority and the London Stock Exchange. But a listing is confidently expected in the next two or three weeks, explained Nick Blake, Vanguard's head of retail, when I picked up the phone and chatted to him about the launch.

"We're in the hands of the regulators," he said. "But it's a matter of weeks, not months -- and it could well be as short as just a couple of weeks."

But the critical piece of paper has already arrived: authorisation from the Central Bank of Ireland. And that's because the new ETFs are to be Dublin-domiciled -- which can bring some handy tax advantages.

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Not just the FTSE

Even better, the new Vanguard ETFs go beyond just the FTSE. The other four ETFs launched today provide investors with low-cost access to products tracking America's S&P 500 index, the FTSE All-World index, the FTSE Emerging Markets index and UK government bonds.

And this is just for starters, stresses Mr Blake.

"It's a start, and one that we'll build out from," he told me. "It's a good mix of ETFs to enter the market with, and we'll go from here, adding more as we go forward."

But in the meantime, here's the full list of the ETFs launched today -- although the tickers, you should note, won't become active until the new ETFs are actually traded on the Stock Exchange.

ETFTER
Vanguard FTSE 100 ETF (LSE: VUKE)0.10%
Vanguard S&P 500 ETF (LSE: VUSA)0.09%
Vanguard FTSE All-World ETF (LSE: VWRL)0.25%
Vanguard FTSE Emerging Markets ETF (LSE: VFEM)0.45%
Vanguard UK Government Bond ETF (LSE: VGOV)0.12%

Note: At the time of writing, tickers not yet active, pending LSE listing.

One-stop shop

Now, if you've read this far, it won't have escaped your notice that I think that this is very welcome news. I personally hold Vanguard trackers within my ISA and SIPP, and I suspect I'll be adding one or more of these ETFs, too.

In short, they fulfil some very obvious needs -- not just cheap FTSE-tracking, but access to other world markets as well. Heck, with government gilts in the mix, they're even a sort of 'one-stop' asset allocation tool.

And for investors using Hargreaves Lansdown's popular fund platform, there'll be some arithmetic to do. Do these ETFs, in short, offer a way around Hargreaves' controversial platform fee? For some investors, they may well do. Especially those with smaller savings pots.

Due diligence

That said, if you're new to ETFs -- and new to Vanguard, which only arrived here in 2009 -- you'll want to do some research. In particular, it's worth waiting until the listing to get a feel for the bid-offer spreads that will emerge from market makers.

This article, for instance, is one of several here on the Fool that will get you up to speed on what ETFs are, and why you should consider them. And here's a review of the market's cheapest ETFs -- or, at least, those that were the cheapest until today.

As for Vanguard itself, since pioneering the first retail index mutual fund more than 35 years ago, it has become a leading global provider of index vehicles including ETFs and trackers. Holding £741 billion in index mutual fund assets and an additional £109 billion in ETF assets globally, it has ETFs listed on exchanges in the United States, Canada, Mexico and Australia.

Broader picture

The wider impact on the market shouldn't be underestimated. In under three years, for instance, Vanguard's trackers have clocked up over £3 billion in funds under management -- and that's without a direct sales marketing operation.

In short, if you have a Vanguard tracker, then the odds are that you've learned about it from an IFA, word of mouth or through articles such as those here on the Fool.

And putting today's launch in stark context, iShare's FTSE 100 ETF is a whopping four times the cost of Vanguard's equivalent.

So is Vanguard set to clean up? Tom Rampulla, managing director of Vanguard Asset Management, laughed diplomatically when I put the question to him:

"What I will say, based on our experiences elsewhere in the world, is that if you track the underlying index well, and we do, and you have the lowest cost in the marketplace, and we do, then you tend to get your fair share of assets under management."

Want to learn more about shares, but not sure where to start? Download our latest guide -- "What Every New Investor Needs To Know" -- it's free. The Motley Fool is helping Britain invest. Better.

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> Malcolm holds index trackers from Vanguard. He does not hold shares in any other company mentioned here. The Motley Fool owns shares in Hargreaves Lansdown and has recommended shares in Hargreaves Lansdown.

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Comments

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QuantumDealer 16 May 2012 , 12:48pm

I think the ticker for the S&P ETF appears wrong as it replicates that of the FTSE100 one above it. Please check and amend.

Thanks for the details on the new ETFs. They appear very attractive on a TER basis especially the EM equity one.

TMFSamR 16 May 2012 , 1:03pm

Hi QuantumDealer, thanks for pointing that out - the S&P ETF ticker is LSE: VUSE, as now shown.

BarrenFluffit 16 May 2012 , 1:11pm

Vanguard FTSE All-World ETF might be a nice default equity option provided there are enough shares in it

buywhenhigh 16 May 2012 , 1:13pm

I have a stupid Q.

On the FT100 ETF, do you dividends like you would if you just bought the individual shares, or do you lose dividends and it just tracks the FT100?

Cheers

Cisk999 16 May 2012 , 1:44pm

Can I buy these monthly without using Hargreaves and their fee? e.g. through TD etc?

OxonianCambion 16 May 2012 , 2:03pm

I don't know the details for the vanguard fund but for every other ETF I know of, you do get the dividends yes. Either directly if they are "distributing" (equivalent to Inc.) or rolled back into the fund if they are "capitalising" (equivalent to Acc.) This happens even with synthetic ETFs (which I don't think the Vanguard funds are.)

As ETFs are just stocks you should be able to buy them using TD, though I've noticed not all shares are available in their regular savings scheme.

I see TD will be restructuring their OEIC fees post RDR - but in what appears to be a good way! (For funds that used to give them a kickback >0.5% they will have a 0.35% platform fee and for funds less than that, the platform fee is zero! Their kickback they will refund.)

One can't buy the Vanguard OEICs vie TD though. :-(

Luniversal 16 May 2012 , 2:32pm

How much longer will the bearded wonder be able to charge 1% pa on Virgin's Footsie tracker?

Dylantherabbit 16 May 2012 , 2:37pm

FTSE All World ETF looks interesting. I hope they offer accumulating funds and not just distributing. iShares offer some accumulation versions of there ETFs.

Overall these look very good, FTSE All Share next please..

lootman 16 May 2012 , 2:51pm

Barren, the FTSE AWI contains 2,300 shares acros 49 countries. So, yes, I'd say it is broad enough.

In some ways that might be the best choice for those who want to keep it simple. Just one ETF and you have the whole world (of equities, anyway). Not bad for 0.25% per annum.

mcecaro 16 May 2012 , 4:17pm

we need US or NORTH AMERICA equity income ETF

Yield 3.5% - 4%

Ratio pay out 60% or lower

3-5-10 dividends history

Large - mid - small cap

jackL27 16 May 2012 , 5:51pm

Don't you think it is worth mentioning the fixed £2 per month per holding platform fee that HL charge for the SWIP and Vanguard funds? This drastically outweighs the TER on a smallish investment (0.48% on £5k holding). Don't know what other companies charge but it seems that there is no option with the SWIP fund as this is exclusive to HL!

MunroMan 16 May 2012 , 6:54pm

At the that sort of TER it must be a synthetic. Has Vanguard disclosed the structure yet?

MDW1954 16 May 2012 , 8:05pm

Hello jackL27,

I did. As in: Do these ETFs, in short, offer a way around Hargreaves' controversial platform fee?

Malcolm (author)

bumpersheep 16 May 2012 , 8:48pm

Re: HL - as I understand it, an ETF will cost £11.95 to buy plus stamp duty, market spread, and 0.5% per year in ISA's or Sipps.
I guess a £24 pa. platform fee could be cheaper..

lootman 16 May 2012 , 9:49pm

Bumpersheep,

HL should not be charging stamp duty on any Irish-domiciled ETF.

That doesn't mean they won't try, only that you should complain if they do.

JohnnyCyclops 16 May 2012 , 10:03pm

Re: HL - as I understand it, an ETF will cost £11.95 to buy plus stamp duty, market spread, and 0.5% per year in ISA's or Sipps.


Will the Vanguard ETFs be available from other suppliers than just HL?

lootman 16 May 2012 , 10:06pm

Essex,

I haven't seen a statement by Vanguard UK about what the structure of their ETF's will be, but a reasonable guide would be how they do it in the US, where they have had ETF's for several years now.

They do not use derivatives AFAIK. They do use sampling for indexes with a large number of illiquid constituents, such as the Russell 2000 and 3000. But Vanguard are about as kosher an index fund manager as you can find.

Their TER's are low because that is their entire business model, and because the funds own the enterprise. Their cheapest ETF in the US is just 0.05% per annum - their S&P 500 ETF ticker VOO.

lootman 16 May 2012 , 10:08pm

Cyclops,

Since ETF's are exchange-traded, they will be available through any normal stockbroker. You won't need to use a fund supermarket like HL at all. Indeed, that is part of the beauty of them.

So you will have a commission the same way you do as with buying individual shares. But there should be no other fees. Although of course HL may try and stick you with some creative charge if you are a captive soul.

MunroMan 17 May 2012 , 8:54am

Lootman,

As I am currently banned from the boards this is the only place I can make my points.
Even with stock lending rebated to the investor, which is proabably 10 bps max, I struggle to see how Vanguard can offer a fully physical FTSE 100 at that price after allowing for other costs, not least of which are index fees.

Do investors have any idea what index providers charge?

It is important to remember that even with ETFs the TER is not the full cost charged to the fund because it does not include dealing costs. Have a look at the Total Cost of Operation tab on this website (yes it ours)
http://www.smart-beta.co.uk/tables.html
and you can see that for some Vanguard OEICS the full costs are closer to 1% than the advertised 0.5%.
Vaguard is a class act but it is still not above gaming the system like the other operators.
These ETFs offer to provide the same returns as the index. In effect it is one large structured product. It does not mean that they actually invest in those stocks in the index and that means that they canot exercise any corporate governance over them.

MDW1954 17 May 2012 , 9:19am

Essex,

It does not mean that they actually invest in those stocks in the index and that means that they canot exercise any corporate governance over them.

As the article says, these ETFs are fully physically replicated. So they *do* invest in the stocks.

Malcolm (author)

MunroMan 17 May 2012 , 11:28am

Malcolm,

Has Vanguard confirmed every stock will be held in full and it will not use derivatives at all?

How much stock will it lend out, who to, for how much and who gets that revenue?

lootman 17 May 2012 , 2:20pm

Essex,

Again, the best guide we have is their US ETF operation. They have a number of broad market ETF's with a TER between 5 and 10 basis points. Their open-ended funds are that cheap too. Costs are probably a little less in the US, and the competition is tougher, so that may be part of it too.

They also have enormous economies of scale, of course.

And they run as a non-profit. Sort of anyway.

Another factor is that Vanguard have an unusual structure for their ETF's, which they have copywrited, which means that the ETF and the OE version of the same fund are both share classes of underlying pool of assets. This, apparently, is more efficient and allows further economies.

I have never seen a case where they use derivatives. In fact, they are a very conservative investment house, and don't bring out "flavour of the month" funds. If anything, they are too slow to be innovative, but such caution has helped them. They never had a "tech fund", for instance, during the dotcom boom.

They may use sampling for illiquid indices but that's generally accepted as prudent.

Yes, dealing costs, commissions and spreads aren't part of the TER. But then that is true for every fund. Those costs will be reflected in the tracking error, though, along with the TER, so I'd contend that that is the best guide to overall costs and to their tracking skills.

I don't think it's fair to say that it's like a structured product, because it is not a credit obligation of the fund issuer. Vanguard "stack 'em up high and sell them cheap" and that is why they have become so successful. Competing with them on price is near impossible, and they haven't put a foot wrong (yet anyway) in terms of ethics. They are trusted.

Loot

PS: I'm sorry you're banned.

MunroMan 17 May 2012 , 4:08pm

Don't get me wrong, I have enormous admiration for Vanguard and it demonstrates how mutually owned finance businesses in the UK completely missed a golden opportunity.

But only a few years ago Vanguard said it saw no reason to introduce ETFs and I have never read a good explanation of why it changed its mind..

lootman 17 May 2012 , 5:45pm

Essex,

I can't tell you exactly why Vanguard embraced ETF's after previously being down on them. But I'd guess it had something to do with founder John Bogle standing down from day-to-day management of Vanguard in or around the year 2000. Bogle was of course a huge fan of index funds but was (and I think still is) critical of ETF's.

2000 was also about the same time that iShares started pushing out ETF's, which rapidly became a success not just with the small investor but also with institutions, who used them to get rapid exposure to markets and market segments.

I suspect that Vanguard sans Bogle saw that the marketplace might pass them by if they defiantly stuck only with OE index funds, and so started their own range of ETF's, albeit as sibling share classes of their existing funds.

And of course they did what they always did and undercut everyone else on price, while maintaining tracking fidelity. Since many people have their own views on whether OEIC's or ETF's are better, why not offer both?

MDW1954 17 May 2012 , 10:47pm

Lootman,

I agree with your assessment, which concurs with what I have been told by Vanguard sources.

Malcolm (author)

westwinds3 18 May 2012 , 8:09am

I guess that one reason they have gone for ETFs here may be that their OEICs were not easily available to the average investor. I hold some through Alliance Savings, but in general to get them at all you had to pay the saving in charges to an intermediary.

MunroMan 18 May 2012 , 9:59am

Maybe I am just too old and cynical. But if Vanguard can't get OEICs to work at less than £100k a pop you have to wonder what it is that makes it economic for it market an ETF that, as I understand, has no minimum size.

You don't get that extra convenience without giving up something. Vanguard should disclose that, or journalists should ask.

MDW1954 18 May 2012 , 1:28pm

Sorry Essex, don't understand your point about the £100K. I hold Vanguard on two fund supermarkets, and am not aware of any £100K minimum.

Malcolm (author)

MDW1954 18 May 2012 , 3:20pm

Hello again, Essex.

Something here on Vanguard stocklending:

http://boards.fool.co.uk/regarding-the-new-vanguard-etfs-in-the-uk-three-12555735.aspx

Malcolm (author)

lootman 18 May 2012 , 7:22pm

MDW,

I think Essex means that if you buy a Vanguard OE fund directly from Vanguard, then 100k is the minimum they will allow. Intermediaries are clearly not restricted in that way.

Essex,

ETF's are easier from a fund manager's perspective because the relationship with the investor who buys shares is one step removed. Assuming a nominee account, the broker will handle much of the accounting leaving the fund manager to focus on the product rather than the customer relationship.

It is significant in that regard, therefore, to consider that iShares were introduced by a fund manager who previously had no retail business at all. Barclays Global Investors, as they were then, was purely an institutional money manager, and so ETF's were an easy way to enter the retail market for them.

dejw 19 May 2012 , 9:34am

Hello

Perhaps I am thick, but I've tried entering Vanguard tickers cited above into the MF share Dealing service without success.

What am I doing wrong?

DejW

rockrat32 19 May 2012 , 11:04am

i bouhgt the ishares via HL, and no stamp duty was paid

MDW1954 19 May 2012 , 12:13pm

Hello dejw,

As it says both immediately *above* the box containing the tickers, and immediately *below* it, the tickers aren't yet active. Read the bit in the article about when the listing takes place to see when they *will* be active.

Cheers!

Malcolm (author)

MDW1954 23 May 2012 , 8:57am

UPDATE MAY 23rd. The ETFs have now been listed. Vanguard's Tom Rampulla rang the LSE's opening bell.

Malcolm (author)

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