Vanguard undercuts rivals with low-cost London-listed ETF range

May 16th, 2012 | By | Category: Equities

After much anticipation among followers of the European ETF industry, indexing giant Vanguard has formally announced that it has received regulatory authorisation for a suite of Irish-domiciled ETFs, and that an initial five funds will be listed on the London Stock Exchange shortly.

Vanguard undercuts rivals with low-cost London-listed ETF range

Tom Rampulla, managing director of Vanguard: “We have chosen to launch the physical-backed ETF replication model because it is straightforward and easy to understand.”

The launch comes in advance of the introduction of the Retail Distribution Review (RDR), which is expected to boost interest in ETFs, and follows recent regional sales hires by the firm.

The five ETFs, all of which are physically-backed and come with total expense ratios (TERs) of between 0.09% and 0.45%, are the Vanguard FTSE 100 ETF (VUKE), the Vanguard S&P 500 ETF (VUSA), the Vanguard FTSE Emerging Markets ETF (VFEM), the Vanguard FTSE All-World ETF (VWRL), and the Vanguard UK Government Bond ETF (VGOV).

Commenting on the launch, Tom Rampulla, managing director of Vanguard, said: “At Vanguard, we see ETFs and traditional mutual funds as two sides of the same coin. Vanguard runs both its traditional funds and its ETFs using the same philosophy, process and people. Both products offer investors a low-cost way to access broadly diversified stock and bond investments. Simply put, we want to offer clients the best investment product in the way they want it delivered.”

Rampulla added: “We have chosen to launch the physical-backed ETF replication model because it is straightforward and easy to understand. We have created a suite of educational materials to help advisers, institutions, and investors understand ETFs and become comfortable with how ETFs work. We believe that through our experience and indexing expertise, Vanguard offers a unique combination of low-cost, tight-tracking ETFs from a provider that investors can trust.”

Since the company’s founding in 1974 by industry legend John Bogle (in 1999, Fortune magazine named Bogle as one of the investment industry’s four ‘Giants of the 20th Century’), a proponent and pioneer of the “common sense” indexing approach to investing, Vanguard has built up a reputation for low-cost and simplicity.

Earlier this year, in response to the increasing number of exotic leveraged and inverse funds being launched, Vanguard Chief Investment Officer Gus Sauter reiterated this simplicity-oriented approach, calling on the ETF industry to be responsible in developing new products and to make greater efforts to educate investors about ETFs.

The five London-listed ETFs, with TERs ranging from 0.09% to 0.45% (the UK industry average is 0.53%, though this does include a number of more costly ‘smart beta’ ETFs), will put pressure on competing products from Vanguard’s main rivals, Blackrock’s iShares, SSgA’s SPDRs and Deutsche Bank’s DB X-trackers.

The pressure will be noticeable. For example, the Vanguard FTSE 100 ETF (VUKE) comes with a TER of 0.10% compared to 0.40% for the comparable iShares FTSE 100 ETF (ISF) and 0.30% for the DB X-trackers FTSE 100 ETF (XUKX). SSgA does not offer a FTSE 100 ETF, but its SPDR FTSE All Share ETF (FTAL) charges 0.30%.

Similarly, the Vanguard UK Government Bond ETF (VGOV), which comes with a TER of 0.12%, competes favourably with the iShares FTSE UK All Stocks Gilt ETF (IGLT), the DB X-trackers IBOXX £ Gilts Total Return Index ETF (XBUT), and the SPDR Barclays Capital Sterling Aggregate Bond ETF (UKAG), which has over 2/3rds invested in UK Gilts, all of which charge 0.20%. Investors should consider, however, that a TER does not reflect total cost of ownership, such as brokerage fees and liquidity issues.

This focus on low fees has helped the company win assets. Today, Vanguard has £109 billion in ETF assets globally, with ETFs listed on exchanges in the United States, Canada, Mexico and Australia. In the United States, Vanguard led the industry with nearly £23 billion in ETF cash inflows in 2011.

Indeed, in April this year alone Vanguard collected $4.4 billion in the US, four times more than the next closest US ETF provider and nearly twice as much as the rest of the industry combined. Impressively, the company’s ETF offerings last experienced a monthly outflow in February 2003.

The initial five ETFs are as follows:

Exchange Traded Fund (ETF) TER Ticker (GBP) Ticker (USD)
Vanguard FTSE 100 ETF 0.10% VUKE
Vanguard S&P 500 ETF 0.09% VUSA VUSD
Vanguard FTSE All-World ETF 0.25% VWRL VWRD
Vanguard FTSE Emerging Markets ETF 0.45% VFEM VDEM
Vanguard UK Government Bond ETF 0.12% VGOV

Vanguard is expected to roll out more ETFs in the coming months. Knight Capital Europe will be a registered market maker.

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