Vanguard Launches UK-Based Index Funds

Vanguard, the US-based pioneer in index fund management, has announced the launch of 11 new passive bond and equity funds for UK investors. This fund issue marks the first step of Vanguard, which manages over £320 billion worldwide, into the UK market.

The funds will open for investment on 23 June and will consist of five UK open-ended investment companies and six Irish-domiciled, sterling-denominated UCITS funds and share classes. The company explained its decision to choose different legal structures for the funds by considerations of tax efficiency, cost and economies of scale.

A full list of the 11 new funds is given in the table below, together with the index tracked, total expense ratio or annual management charge and, for some of the funds, a purchase fee.

Vanguard has previously stated that it is targeting the UK advisory market to source its investors, and specifically those advisors who are remunerated by fee, rather than commission. While a direct investment in the new funds is subject to a £100,000 minimum investment size, Vanguard expects the majority of new investment business to come from the platforms used by independent financial advisors, which amalgamate client flows.

Vanguard explains that the purchase fee levied on seven of the 11 funds is to cover the transaction costs involved in buying and selling the underlying securities in the funds, whether local taxes or bid-offer spreads. The purchase fee may vary over time, and the firm says it expects the 1.5% fee on the Vanguard U.K. Investment Grade Bond Index Fund to reduce over time.

A direct comparison with the cheapest UK-listed exchange-traded funds tracking the same index, where existing, on the basis of annual charge or total expense ratio is given in the table below.

On the basis of annual cost alone, the Vanguard index funds are cheaper than the equivalent ETFs, where they exist. However, a full comparison of the relative attractiveness of the two competing vehicles would have to take into account ETFs’ intraday liquidity, the lack of a purchase fee on ETFs, the bid-offer spread on ETFs, the fees levied to buy Vanguard funds via an IFA platform, the existence or otherwise of stockbroker commissions and, in some cases, differing tax treatments (for example, the ETFs tracking UK equities offered by Lyxor and db x-trackers use a swap-based replication methodology, meaning that they are unlikely to hold the underlying UK equities and are therefore unlikely to incur UK stamp duty).

In a company press release, Tom Rampulla, managing director of Vanguard Investments UK, said: “Vanguard’s index funds offer investors broadly diversified exposure to equity and fixed income markets, at very low cost. Costs matter, as each pound of cost is a pound taken out of your investment. We are confident that these funds have among the lowest total expense ratios in their peer groups.”