Commentary by David Hsu, senior equity index and ETF product specialist, Vanguard Europe.
Low fees are one of the cornerstones of Vanguard’s proposition for investors. Our philosophy of delivering long-term value to investors is driven in part by maintaining the lowest possible charges across all of our products. It’s why investors across the world have entrusted us with over $2.2 trillion1 in exchange-traded funds (ETFs) alone.
Vanguard is an indexing pioneer with decades of experience, launching the first index fund for retail investors back in 1976. Since then, we have constantly refined our approach to give more value to investors, launching our UCITS ETF range in Europe in 2012.
Our global presence and scale can provide material benefits to our ETF investors. With trading desks in the US, UK and Australia, we are able to establish broker relationships at a local level, allowing us to cover 50 indexed countries2. This, together with the significant volume of transactions we place, gives us strong bargaining power when it comes to negotiating fees and commissions – and it ensures that wherever or whenever in the world our ETFs trade, we have experts on the ground making informed and timely decisions.
In addition, we invest heavily in the systems and technology that both promote efficiency of trading and seek to keep us one step ahead of the evolving market. For an ETF to truly fulfil its objective, it requires intensive day-to-day cash flow management and monitoring to ensure it consistently reflects the ever-changing composition of the index it seeks to replicate. We also aim to keep our ETFs’ tracking errors tight relative to their respective benchmarks to maintain our investors’ portfolios at optimum efficiency.
Vanguard has also created an integrated investment team structure that is designed to give our investors the best possible outcomes. This includes combining the role of portfolio manager and trader, which is especially important when responding to upcoming index rebalances, corporate actions and daily cash flows.
The portfolio manager-trader role enables us to understand and manage the entire investment process by bringing together expertise, technology, scale and a team-based approach. It helps us to maintain a low tracking error while at the same time minimising our ETFs’ transaction costs.
But it’s not just our investors who have benefitted. Vanguard’s success in delivering and maintaining consistently low costs has helped to bring down fees for investors in general.
In the United States, the average asset-weighted expense ratio for all industry funds fell to 0.49% by the end of 2021 from 0.73% in 1975, the year Vanguard first entered the market. For Vanguard’s own US-based funds over the same period, it shrunk to 0.09% from 0.68%3.
We’re seeing a favourable trend in Europe too, not least with ETFs. As the chart below shows, as Vanguard has successfully maintained consistently low costs over the past decade, fees have also gone down for ETF investors across the industry. Since the launch of the Vanguard UCITS ETF range in 2012 there has been a seven-basis-point drop in the European industry’s ongoing charges figure (OCF4).
There is still some way to go. As at March-end 2022, the gap between Vanguard’s European ETFs and its industry peers remained conspicuously wide at 14 basis points. But it’s moving in the right direction – not just as a result of the ‘Vanguard effect’ but also through increased competition, as measured by the chart’s right-hand axis, which shows the growth in the overall number of ETFs in Europe.
Source: Morningstar as at 1 March 2022. Data from 1 May 2005 to 1 March 2022. Peer group is the relevant Morningstar category for Vanguard’s individual ETFs.
Even as we've broadened out our range with new exposures like fixed income, environmental, social and governance (ESG) and multi-asset ETFs, Vanguard has continued to offer good-value ETF solutions across the board, evidencing our commitment to provide investors with enduring products on a consistently priced basis.
The returns generated by the Vanguard range of UCITS ETFs since their launch 10 years ago corroborates our view that value need not compromise performance. The chart below shows that, in addition to charging lower fees, our ETFs have performed better than their peer group 68% of the time, net of fees5.
Past performance is not a reliable indicator of future results. Source: Morningstar as at 1 March 2022. Data from 1 January 2013 to 1 March 2022, NAV to NAV, net of fees and distributions. Peer group is the relevant Morningstar category for Vanguard’s individual ETFs.
ETFs are a key part of Vanguard’s mission to give investors the best chance of investment success.
Acquiring the best talent, investing in the most up-to-date systems and establishing a global presence all help us to deliver value to our ETF investors. Our scale helps us too.
As a result, we have not only been able to make good on our pledge to drive down costs for our investors but also for ETF investors everywhere, thanks to our leading position in an increasingly competitive market.
1 Source: Vanguard, as at 31 March 2022.
2 Source: Vanguard, as at 31 December 2021.
3 Sources: Vanguard, Morningstar, Inc., and Lipper, a Thompson Reuters company, as at 31 March 2022.
4 Ongoing charges figure as reported under MifID II . As at 31 March 2022.
5 Vanguard calculations based on Morningstar data as at 31 March 2022.
Investment risk information
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