One Year In, How Do Vanguard's ETFs Measure Up?

For UK and US equity exposure, Vanguard's ETFs have the edge in terms of tracking difference, while iShares' ETFs offer the tightest trading spreads

Alastair Kellett 18 June, 2013 | 6:15PM
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We’ve now passed the 1-year mark since Vanguard, a fund behemoth in the US, launched its European ETF business with products linked to the FTSE 100, the FTSE All-World, the FTSE Emerging Markets, the S&P 500 and a Barclays global government bond index

The Vanguard FTSE 100 ETF (VUKE) and Vanguard S&P 500 ETF (VUSD) are by some margin the biggest of that group, with assets of roughly £230 million and £400 million, respectively, at the time of writing. They are also competing with a host of other European-domiciled ETFs that track the same indices. So one year in, how do Vanguard's contributions to the European landscape measure up against their more established peers? 

The most noticeable points of comparison are the funds' total expense ratios (TERs). Vanguard is structured as a mutual company wherein the management firm is owned by the investors in its funds. That has traditionally allowed it to offer funds with extremely low fees, since any fee income is designed to profit the unitholders anyway, not a separate constituency that might argue for higher margins from the customer. To wit, Vanguard FTSE 100's TER of 0.10% is the lowest among the group of European-domiciled ETFs tracking that index, where the rest range from 0.25% to 0.40% (see figure 1). Its S&P 500 ETF has a TER of 9 basis points. That’s the same as HSBC S&P 500, although it isn’t the lowest in the group, a distinction that belongs to UBS ETFs plc S&P 500, which sports a TER of 0.05% (see figure 2). 

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Another way of thinking about the cost of holding an ETF is the degree to which its performance has differed from the index it aims to track over a specific time period. That tracking difference will be affected by the TER, but also by any costs or gains associated with the replication method employed, securities lending, taxation levels and any other realities of managing a portfolio. 

In the one-year period through the end of May 2013, Vanguard FTSE 100 exhibited a tracking difference of -0.15%. That was the best in the group; the rest of the pack ranged from -0.32%, in the case of ComStage ETF FTSE 100, to -0.58% in the case of CS ETF (IE) on FTSE 100. The largest fund in the peer group, iShares FTSE 100, with assets of some £3.8 billion at the time of writing, exhibited a tracking difference of -0.47%. 

Of course, the ongoing expenses involved in holding an ETF are not the only costs of ownership. There are additional costs associated with buying or selling an ETF that you need to take into consideration. Trading costs typically include brokerage commissions, bid-ask spreads and market impact. While brokerage commissions vary greatly across investors, and market impact is notoriously difficult to quantify, bid-offer spreads can be measured by looking at the daily average spread as a percentage of the fund's market price. 

By this metric, with an average spread of 16 basis points over the past six months on the London Stock Exchange, Vanguard FTSE 100 lands in the middle of the pack. The best, perhaps unsurprisingly given its size, was iShares FTSE 100 with an average spread of 4 basis points, and the worst was CS ETF (IE) on FTSE 100 with an average spread of 32 basis points (see figure 1). This data wasn’t available for all the funds in the group. 

The Vanguard S&P 500 ETF stacks up against its peers in much the same way. Its one-year tracking difference through the end of May was the best in the group, at -0.52% versus an average of -0.72% (see figure 2). Its average spread on the LSE, at 13 basis points, was towards the low end of the range but not as good as iShares S&P 500, with an average spread of 5 basis points. 

So on UK and US equities, it seems to be shaping up that Vanguard has the edge in terms of tracking difference, while iShares has been able to offer the tightest trading spreads. Which is more important? If you’re trading frequently, or expect to hold an ETF for only a short period, lower spreads might be the most important thing for you to look at. Whereas if you're a buy-and-hold investor, the spreads will be less vital because they only impact you on the occasions when you want to buy or sell the fund. But then again, explicit holding and trading costs are only part of the picture when selecting an ETF, and other factors such as the underlying index, replication method, counterparty risk, tracking error, and so forth, all matter too. Costs should be one (albeit important) component of your overall assessment.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Alastair Kellett

Alastair Kellett  is an ETF analyst with Morningstar Europe.