Vanguard tends to be investors’ first port of call when it comes to index investing and ETFs, which in many cases are the investment products that we believe should be at the foundation of any respected investor’s portfolio.
Vanguard products are diverse and cheap enough to provide a one-stop-shop for investing, no matter your experience level. It is up to you just how complicated you make it and Vanguard really do try and simplify the entire process.
As one of the biggest ETF providers on the planet, with trillions of dollars of assets under management, we’ve regularly mentioned Vanguard on this website. Their investment range is incredibly cheap, they are always lowering costs for price conscious investors, and here in the UK they even have their own investment platform.
So, in this post we’re going to give you the complete guide to Vanguard investing for UK based investors. By the end of this guide you will know everything that you need to know to either begin investing or to take your investing up another level. Let’s check it out…
A Brief History
The late Jack Bogle, the founder of Vanguard, created the first public index mutual fund in 1975, tracking the S&P 500. At the time, it was heavily derided by competitors as being “un-American” for making no attempt to beat the market, and the fund itself was referred to as “Bogle’s folly”.
Fidelity Investments Chairman Edward Johnson was quoted as saying that he “[couldn’t] believe that the great mass of investors are going to be satisfied with receiving just average returns”.
Fast forward to today and we know that index tracking, whether that’s in the form of index funds or Exchange-Traded Funds, is forever growing in popularity.
That first Vanguard index fund started with just $11 million of assets under management but today’s equivalent now manages $573 billion of assets.
Differences Between The US and UK
Here in the UK we frustratingly get fed a lot of US-based information that isn’t always relevant to us. This is especially true when it comes to investing.
There are often differences in terminology. For example, in the US they have Mutual Funds, whereas in the UK our equivalent is called an Open-Ended Investment company or OEIC.
We also have different account types. In the US they have accounts such as Roth IRAs and 401(k)s but these are totally irrelevant to UK investors. In fact, in the UK we have even better accounts such as the SIPP and ISA.
When it comes to Vanguard, the UK Vanguard offers a slightly different service to the US version in that it is a much slimmer and streamlined offering. That’s means it’s even simpler to understand but with reduced investment choice.
What Vanguard Offers In The UK
Vanguard’s offering can be split into about 5 distinct areas:
- Index Funds;
- Fund of Funds;
- Active Funds; and
- An Investment Platform.
ETFs and Index Funds
ETFs and Index Funds are our preferred way to invest in the stock market, and we use them to build a core portfolio that aims to track the whole world market.
Vanguard is ideal for this because they have focussed on creating regional based funds such as funds that hold European stocks, North American stocks, Asia Pacific stocks, and so on.
There are differences between ETFs and Index Funds, but a beginner investor probably doesn’t need to get bogged down in the intricacies of these investment vehicles. They essentially both pool investors’ money together allowing investors to get much wider diversification than what they could get on their own. For instance, the Vanguard FTSE Global All Cap Index Fund, one of our favourites, holds 6,900 stocks from across the world.
ETFs and Index Funds are able to do this for incredibly cheap fees and Vanguard are at the forefront of this price competition. This particular fund costs just 0.23%, but costs can and do go much lower. For example, Vanguard have a S&P 500 ETF, which tracks 500 of the biggest US companies, for an almost non-existent fee of just 0.07%.
Fund of Funds (FOF)
Vanguard have a great set of funds that invest in other Vanguard funds. They are essentially a one-stop shop for the lazy or uninclined investor, which we think are great for those who don’t want to manage their own portfolio.
The first set are called the LifeStrategy funds. There are actually a few different versions and the idea is that you pick one based on your attitude to financial risk.
Each LifeStrategy fund will contain a mixture of Shares and Bonds. For instance, Lifestrategy 100 is 100% allocated in shares, but LifeStrategy 80 has 80% in shares and the remaining 20% in Bonds. LifeStrategy 60 has 60% in shares and 40% in Bonds. You get the picture.
Considering each LifeStrategy fund is a ready-made portfolio the fee is unbelievably cheap at just 0.22%.
Shares generally provide greater returns than bonds over the long term but are riskier.
As two dudes who love investing you might think it were strange if we were to tell you that we both invest in LifeStrategy 100 ourselves. Those that watch this channel regularly will know our efforts go towards financial freedom today, and so we can’t be bothered to manage our own pensions. This makes the LifeStrategy range ideal for our very long-term investments and could suit yours too.
To get an idea how these funds work, here are the underlying funds within the LifeStrategy 80 fund. LifeStrategy funds contain other Vanguard funds and ETFs based on Vanguard’s own proprietary global view. By this we mean it’s not a genuine global tracker as it’s been tilted towards UK listed securities.
If you want to explore each individual holding you can find it on Vanguard’s own site, or for a good overview some investment sites give a great snapshot of the portfolio, such as what can be seen here on Fidelity’s site.
(2) Target Retirement Funds
The next set of Fund of Funds from Vanguard is their Target Retirement range, which cost just 0.24%.
These are ready-made portfolios specifically designed to be used for retirement savings. They shouldn’t be confused with a pension though as they can be bought within many investment accounts including Pensions, but also General accounts and ISAs.
Target Retirement Funds are similar to the LifeStrategy range, in that they too hold Vanguard funds. The way they differ is that the equity allocation is reduced over time and replaced with a higher bond allocation, called a glide path approach. The theory is that investors will want to de-risk as they approach retirement age. This is achieved by moving to a higher allocation of less risky bonds.
All you need to do is pick the fund closest to the year when you want to retire. So, for example, if you were between age 20-23, Vanguard suggest you choose the Target retirement Fund 2065 based on a retirement age of 63 to 68. However, there is a wide choice and you just need to choose the one that suits you.
We’re not too sure whether a glide path is as relevant today as it once was for retirement savings. Up until just a few years ago you were legally required to buy an annuity with your pension, so it made sense to de-risk as you age.
Nowadays, we all have lots of freedom with what we do, and many investors will remain invested in the markets. Therefore, a larger equity allocation is probably more prudent than what this fund provides and certainly something we would prefer with our own retirement pots.
Vanguard are known for their index funds and ETFs, but they do also have a small selection of actively managed funds, which are reasonably priced when compared to other actively managed funds.
The Vanguard Investment Platform
Unlike most other fund and ETF providers, Vanguard also offer their own investment platform. You will be able to open a Personal Pension (known as a SIPP), a Stocks and Shares ISA, a Junior ISA, and a General account.
The main advantage of all these accounts with Vanguard are the low fees, which are incredibly cheap at just 0.15% and there are no hidden nasties such as switching fees or withdrawal fees. Also, there are no additional trading fees, which are ubiquitous on the premium investment platforms.
The main downside is that you would be limited to Vanguard funds, which might not be a problem for most people, but avid investors often want more exotic investments. Most notably you can’t invest directly in stocks or in commodities like Gold through Vanguard. Nor can you make sector specific investments.
Recently we did a video and a post on the gaming industry here and mentioned the VanEck Gaming ETF. This would be unavailable on this platform along with thousands of investments from other fund providers.
Vanguard state that you can invest from as little as £100 per month or add a lump sum from £500 but in our experience, you don’t need to commit to any regular payment.
A lot of younger investors might be disappointed to hear that there is no mobile app but as investing through Vanguard is intended for long term investing, there really is no need to continually monitor it.
A lot of people new to investing often think they can only buy Vanguard investments directly through Vanguard’s own platform, which is not the case. You will be able to buy Vanguard funds and ETFs through any good investment platform.
In fact, Vanguard strangely limit the range on their own platform, so you can only get the full range by using an alternative. Andy (MU Co-Founder) personally uses Interactive Investor, which you can join here.
But the cheapest place to buy Vanguard ETFs are on free trading platforms like Freetrade, as the funds themselves cost the same, but without any platform fee. Vanguard’s platform fee is 0.15% – Freetrade’s is 0%.
Open an account with Freetrade through the link on MoneyUnshackled.com’s Offers page, and Freetrade will award you with a free stock worth up to £200!
Some important takeaways:
- The regional funds/ETFs from Vanguard are incredible but probably won’t cover all your needs. There are no sector-specific ETFs, no commodities, nor any REITs. iShares, SPDR, Invesco and a few others are all great ETF providers. As long as you aren’t using Vanguard’s own platform you will be able to pick and choose what you like from these.
- Most or maybe even all of Vanguard’s funds are domiciled in Ireland. As a UK investor this is generally what you want as it takes advantage of Irish tax benefits.
- Depending on how big your portfolio is, it might be preferable to invest across multiple fund providers. The level of the financial protection from the regulators is not clear for foreign domiciled funds. There are protections in place but being spread across multiple ETF providers will give you added comfort in case the worst was to happen.
- When investing in index funds and ETFs, their ability to track the index is clearly very important. The good news is Vanguard are up there with the best as demonstrated here with their FTSE 250 ETF, which closely hugs the returns of the index year after year.
Finally, an interesting closing point is that Vanguard the company is owned by the funds and is therefore owned by its customers. This is said to be a key reason why they can continually keep lowering costs. Most other investment firms have to strike a balance between pleasing both the customers and the shareholders – for Vanguard, they are one and the same.
What do you think of Vanguard? Would you use their platform or does lack of funds put you off? Let us know in the comments section.
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