US fund giant Vanguard is to launch a 0.15% cat amongst the UK's tracker fund pigeons.
If it were possible to set the Index Tracking world alight, the recent announcement that ace US tracker fund manager Vanguard is about to launch a range of low-cost funds in the UK might be just the thing to do it. Vanguard is, of course, the company that launched the very first US tracker fund, back in 1976, and today it is responsible for over £320b of investors' funds.
Vanguard's new funds will be open for investing on 23 June, with the focus being on low charges. As there is really no difference in fund management expertise between different tracker fund managers (a computer makes the picks, whether the fund fully tracks an index or invests in a representative sample), the only real competitive difference is price.
Low charges
Most UK index trackers these days charge between 0.3% and 0.5% pa. The UK's most popular tracker, from Legal & General (LSE: LGEN), charges 0.5%, while the ever-popular Virgin All-Share tracker still charges a relatively whopping 1%.
Now it looks like Vanguard's UK trackers are going to seriously rock the charges boat, with the cheapest of the new UK funds, the 'Vanguard FTSE UK Equity Index fund', which tracks the FTSE ALL-Share Index, attracting total charges of just 0.15% per year.
Interestingly, Vanguard adds a 0.5% purchase fee, which is added to the fund to cover UK stamp duty, but as stamp duty comes out of other tracker funds anyway, it can usually be ignored for comparison purposes. But it does help to remind us that the UK government is taxing us for investing in the future of our country -- Vanguard is effectively saying "Look, your government charges you far more than we do".
If you fancy investing in US stocks, a Vanguard S&P 500 fund will charge only 0.2%, with a Japanese fund (which tracks the MSCI Japan Index) charging 0.3%.
The downside of these low charges is that, unless you are sufficiently well-heeled to be investing a minimum of £100,000, you won't be able to buy into any of these new funds directly.
The funds will also be made available to third parties, so it will be possible to but them in smaller amounts via fee-based IFAs in the first instance, and hopefully through low-price fund supermarkets later. That will certainly add to the charges, though how much remains to be seen. It's also unclear how quickly these funds will become available via these other channels.
The difference a percent can make
What difference do costs actually make? Now that index trackers have been around long enough in the UK to have built up a reasonable track record (pun unintended), some people are starting to get a bit dissatisfied with the performance of some of them. They can't, of course, exactly match a stock market index, as there are inherent costs in trading in shares -- stamp duty and the market spread with FTSE indexes, for example. But the degree to which some have lagged the index seems quite surprising.
Take that Virgin tracker, for example. It was launched when 1% pa seemed like a low charge (and with the eye-watering charges some managed funds were levying at the time, it was). But today 1% is seen as very expensive, and it shows in the fund's performance While the FTSE All-Share has risen around 110% including dividends since the Virgin launch, the fund has only managed 80%.
Apparently Virgin customers seem happy with this, presumably due to the charisma of cuddly company founder Richard Branson. But that charisma comes at a high price -- if he had his own money in the fund, he'd have missed out on the price of an awful lot of woolly jumpers.
Are they the cheapest?
Will Vanguard funds become the cheapest way for canny UK investors to track a stock market index? There is an alternative to investing money directly into a fund, and that is to buy Exchange Traded Funds, of which iShares are popular examples.
Exchange traded funds also work by tracking a stock market index, but rather than investing money directly into the fund, investors buy and sell shares in the fund itself on the stock market. Being domiciled in the Irish Republic, iShares don't attract UK stamp duty, so the only charges incurred are the funds' total management charges plus your brokerage costs. For the iShares FTSE 100 fund, the total management charges amount to 0.4%.
While Vanguard's new funds are a welcome addition to the UK market and will hopefully bring us a new round of competition over management charges, the fact that they're not directly available to investors of modest means takes some of the shine off them.
But with actual charges getting as low as 0.15%, it does help highlight that the UK's archaic stamp duty is becoming the biggest hurdle to super-low-cost investing. It's long past time that noxious tax was abolished, but that's a rant for another day.
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