Vanguard Investments FTSE UK Equity Index
|Investment Fund (Unit Trust)
Published 22 September 2009
Vanguard has a real winner on its hands with this fund. It's just a shame that it's not suited to those who want to save smaller or regular monthly sums.
- The cheapest FTSE All Share Tracker on the market.
Tracks the FTSE All Share Index which is a bit more diverse than the FTSE 100.
- Not the easiest of funds to buy.
Upfront fee not cost effective for short-term investments.
0.5% (stamp duty)
Alliance Trust dealing fee £12.50
Vanguard, a long established US fund manager, has given the UK fund management industry a much needed kick up the backside with the launch of its ultra low cost FTSE UK Equity Index fund.
In an industry that all too often seems to be increasing annual charges, it's good to see Vanguard firmly bucking the trend by giving investors a rock bottom deal. It's already forced the likes of HSBC to slash costs on their tracker funds in response.
The fund is a straightforward oeic (open ended investment company - similar to a unit trust) that aims to track the FTSE All Share Index. Rather than buy all 800 or so stocks in the Index, it approximates by holding fewer stocks. In practice this should make little difference and, in any case, you could win or lose due to any resulting 'tracking error'.
Where this fund wins the 'battle of the trackers' hands down is charges. Total annual charges are just 0.15% and the 0.5% initial charge is effectively paying stamp duty (on the shares held in the fund) upfront.
Most funds don't explicitly charge stamp duty, it's instead incorporated into the price you initially pay for units then paid by the fund whenever it switches shares thereafter - you'd expect performance to reflect this over time. Confusingly, funds don't have to include stamp duty in their TER figure, making it very much a 'hidden' cost that usually drags performance slightly in the case of trackers (and potentially more in funds that regularly change the shares they hold).
So how much cheaper is this tracker versus a typical actively managed fund?
Let's assume an actively managed fund has a 5% initial charge and total annual costs of 1.6%. Vanguard charges 0.5% initially then 0.15% a year (we'll also assume a £12.50 dealing fee, more on that later). The figures in the table show the value of £10,000 after 20 years assuming an annual return of 6% before charges:
|Value of £10,000 after 20 years|
|Typical Actively Managed Fund
|Vanguard FTSE UK Equity Index
Other things being equal, the Vanguard fund would leave an investor just over £8,500 better off in this example. Of course, the actively managed fund might perform much better in practice so there's no guarantee that a low cost tracker will always make you more money. But it could also perform worse, highlighting the argument for using trackers for at least some of your investment portfolio.
So you're attracted to this fund and want to buy it. This is where Vanguard makes life more difficult, as you can only buy direct when investing at least £100,000. For more modest sums you'll need to either use a financial adviser (who can then buy the fund through an adviser-only 'platform' or 'supermarket' for you) or buy through Alliance Trust.
Buying through an adviser kind of defeats the purpose of buying such a low cost tracker, as their fees could more than outweigh the savings you had hoped to make versus other trackers.
Alliance Trust offers the fund direct to investors via its 'fund supermarket', but you'll face a £12.50 dealing fee when you buy or sell. Fine if you're investing over £5,000, but a killer if you want to save £100 a month. They do, however, offer an ISA wrapper for free if you want it.
Vanguard has a real winner on its hands with this fund. It's just a shame that it's not suited to those who want to save smaller or regular monthly sums. Such investors will probably turn to Fidelity and HSBC, who both offer cost effective FTSE All Share tracker funds (TER 0.27% & 0.3% respectively) with a low minimum investment.
Web Link: http://www.vanguard.co.uk