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Vanguard UK review – the cheapest way to invest?

14–17 minutes to read

Vanguard broke all the rules when it came to its pioneering Vanguard Index Funds combined with a unique ownership structure that directly benefits its customers. Today, it’s one of the biggest investment firms in the world and has recently launched new services directly to UK customers. We review the great things Vanguard UK can now offer, the downsides and of course – is Vanguard UK really the cheapest?

What is Vanguard UK?

Vanguard is one of the biggest fund management companies in the world. Establishing the firm in 1975 with an approach that changed the landscape of investing forever, John Bogle is regarded by many as the grandfather of passive investing. The guy is a legend and sadly passed away in January 2019.

The underlying principle that shook the investment world was and still is, to make money for its investors, not from its investors. Instead of paying dividends to investors, it puts this money back into lowering the costs of its funds.

Crucially, this means there are no outside owners and therefore no conflicting loyalties. The company is owned by its funds, which in turn are owned by the shareholders. This unique client-owned structure allows Vanguard to return profits to fund shareholders in the form of lower expenses. Low costs help clients keep more of their returns, which can help them earn more money over time. As a result, they attract lots of clients that stay with them. Everyone wins.

Vanguard has driven the mass adoption of low-cost index investing, ensuring its clients get maximum value for money with minimal knowledge and time.

As a result, today Vanguard holds £3.5 trillion in assets under management and has over 20 million investors. Its fees are some of the lowest in the market and it has an enviable reputation for looking after its customers.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

What does Vanguard provide in the UK?

Vanguard provides a range of funds that can be purchased through investment platforms such as Fidelity or Hargreaves Lansdown. The funds offered by Vanguard are usually ‘low-cost index trackers’.

In addition, Vanguard has launched its own UK investment platform called Vanguard Investor. Through this platform, you can set up a Stocks and Shares ISA, a Junior ISA or a standard investment account. Vanguard promises some of the lowest platform charges in the market.

However, there is a catch – you can only invest in Vanguard funds.

Vanguard Investor UK Platform

If you want to invest in more than just Vanguard funds, then check out our guide on how to choose the right investment platform here. Most platforms provide an investment ‘supermarket’, allowing you to choose stocks & funds from a broad range of companies and providers.

Active vs passive investing

To understand what Vanguard does and why it is different, we need to first understand ‘active’ and ‘passive’ investing.

  • Active investing – based on continually buying and selling specific investments to try and beat the market at that time. This strategy is fairly time intensive from the research and knowledge required. Plus, it can incur considerable fees from frequent trading.
  • Passive investing (aka ‘buy and hold’) – in contrast, this strategy seeks to minimise fees and maximise returns by keeping the buying and selling down to a minimum. Less time, hassle and costs. It is based on the principle that if you spread your bets wide and stick around long enough, everything goes up eventually.

Vanguard, through Vanguard Index Funds in particular, specialises in providing passive funds for its clients.

So, what are we missing out on if our investments are not actively managed? Well, active management is where a fund manager will proactively and manually select particular investments based on the fund’s requirements. These investments could be in companies, properties or commodities etc depending on the scope of the fund.

For example, a “recovery” style active fund may invest in distressed companies that the fund manager thinks will recover and therefore return a profit in future.

Whereas passive investing aim to match the market, active investing seeks to beat the market. Whether that happens in reality, though, is a different story. In the US in 2019, less than half actively managed funds survived and beat the passive index funds.

If you did want to think about active investing, Hargreaves Lansdown offers some good free guides, such as Guide to Picking Stocks and Guide to Investing in Funds.

Active vs Passive fund fees

One of the problems with active funds is that they typically carry higher annual charges than passive funds. This is because active funds are run by humans who need to make a living and justify their charges by making regular changes to try and beat the market.

Passive funds, on the other hand, are run by computers that make the decisions based on pre-set criteria. Minimal human intervention is required and so teams of researchers do not add to the fund’s annual cost. Once built, computers are cheap and have no children to feed.

A lot of fans have gravitated to passive funds over the years, with one of the biggest advocates being the legendary Warren Buffet. In 2019, Buffet famously announced that despite his seeming ability to picks stocks, he plans to move 90% of his vast fortune into passive index trackers when he passes away. If that is not a good endorsement, I don’t know what is!

Fancy free stocks and shares that could be worth up to £705? Lots of platforms give them away as incentives. Check them out here.

What is an Index tracker?

Index trackers are passive investment funds that aim to track a particular index (think FTSE 100, S&P500 etc) or a commodities price (gold, oil etc). Investors can get complete exposure to an entire index without having to buy all the stocks.

In effect, you are essentially buying a very small piece of every company or commodity in that Index. This means that you are not exposed to the performance of a single or small group of companies, but rather the index as a whole (ie all of them). The result is a significantly reduced risk profile.

It also gives the investor the chance to be hands-off (or ‘passive’), as the fund’s computers are rebalancing the correct allocation of stocks to accurately track the market’s performance.

Furthermore, removing all the trading activity associated with actively traded funds has two important and significant effects:

  1. Low fees – there’s no need to pay expensive analysts, as a computer does the job.
  2. Lower risk – a single poor-performing stock in an index doesn’t have a huge impact on your investment.

Warren Buffet famously made a million-dollar bet in 2007 that an S&P500 tracker fund could beat any actively managed fund over 10 years. As yet, no one has stepped forward to claim the prize!

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Are Vanguard low-cost index funds the best?

Other trackers on the market can synthesise tracking the market using 3rd parties.

What makes Vanguard different, is that no 3rd parties or proxies are involved.

Vanguard funds physically replicate the indices they track. This means they physically buy and sell the shares in the fund using computer algorithms to track the market as closely as possible.

The result is less exposure to risk.

Are Vanguard index funds UK the cheapest?

Vanguard funds carry some of the lowest charges in the UK market. However, they are technically not the lowest.

Vanguard has consistently pushed the costs of its funds lower over the years and the rest of the market has responded.

For example, the iShares FTSE 100 UCITS ETF only charges 0.07% per year. By comparison, the Vanguard FTSE 100 UCITS ETF charges 0.09%. That said, unless you’re holding multi-millions of punds, a difference of 0.02% is not going to hugely affect most people.

However, comparing the Vanguard LifeStrategy series can show a significant difference. Some low-cost index trackers funds are available offering fees of under 0.1%. By comparison, the Vanguard LifeStrategy series carries a cost of 0.22%. However, there is more to this than meets the eye, which we discuss later.

We explain why you may want to pay more for the Vanguard LifeStrategy funds later in this article but let’s stick with straight tracker funds for now.

Remember, the cost of the fund is only one part. You also have to consider the cost of the platform you purchase your funds from (eg, Hargreaves Lansdown). Choosing a more expensive platform can have a significant impact on your overall investment costs, so be sure to check this out.

Vanguard UK Investor platform review

In the past, you could only buy Vanguard’s Index funds within an ISA wrapper from a different platform (eg, the Hargreaves Lansdown ISA). Now, investors can open an ISA directly through the Vanguard UK Investor platform.

And as with everything Vanguard, costs have been driven down to a market-beating rate. Nice.

The platform charges an annual account fee of 0.15% on balances up to £250,000. Anything over £250,000 and the annual fee is waived, meaning you pay a maximum platform fee of £375 per year.

By comparison, Hargreaves Lansdown, one of the most popular UK investment platforms, charges an annual fee of 0.45%. On a portfolio worth £250,000 this would equate to £1,125. That’s a whopping £750 saving and we know that driving down fees has a hugely positive impact on your balance over the long term.

However, there’s no such thing as a free dinner and Vanguard’s market-beating rate comes at a price. Your investments are limited to their own Vanguard index funds only. Great if you are solely a passive index fund investor, but not so much if you’re looking to add Tesco or Amazon to your portfolio.

For investors starting out and looking to build their first £1,000, £10,000 or £20,000 etc, low-cost passive investing is a great way to start accumulating a nest egg. You can set up a monthly direct debit into one of Vanguard’s UK index funds and forget about it for a year.

There are cheaper platforms than Vanguard

Depending on how much money you have, there may be cheaper alternatives.

Interactive Investor is a fixed fee platform, meaning that they charge a fixed fee of either £9.99 every month or £119.88 per year, regardless of your portfolio size.

This means if you have over £80,000, you will pay a lower annual fee with Interactive Investor than Vanguard. If you buy your Vanguard fund via Interactive Investor, the underlying fund charge remains the same.

Interactive Investor also offers investors access to the full market. This means if you want access to more than just Vanguard funds and you have over £30,000 then it could be the cheapest.

You can read our full Interactive Investor – How cheap can investing be? review here.

Vanguard UK LifeStrategy funds – a mini guide

Some of the most popular Vanguard funds in the UK are the LifeStrategy series. Whilst more expensive than the trackers from others above, their exposure is usually linked to a single index (for example, the UK FTSE 100).

If you’re looking to spread your risk and balance your portfolio then, such as investing in the US market, you will need to choose another fund. And what about bonds? Yep, you guessed it – another fund. Even for experienced investors, manually building a balanced portfolio can be confusing and time-consuming.

What the LifeStrategy series provides, whilst more expensive, is a simple ‘all in one’ portfolio. They comprise of a pre-defined balance and diversification of indices and bonds, with a weighting of your choosing based on your tolerance of risk.

They are mainly designed with a weighting (%) towards either the stock market or ‘equity’ exposure (high returns, higher risk) or bonds (lower returns, lower risk). You can then select the weighting towards either of these depending on your appetite for risk.

Fund NameEquitiesBonds
LifeStrategy 20% Equity Fund
Risk: Cautious
20%80%
LifeStrategy 40% Equity Fund
Risk: Moderate
40%60%
LifeStrategy 60% Equity Fund
Risk: Moderate
60%40%
LifeStrategy 80% Equity Fund
Risk: Aggressive
80%20%
LifeStrategy 100% Equity Fund
Risk: Aggressive
100%0%

The LifeStrategy funds are primarily trackers which mean they follow the market trends. Therefore they are never going to outperform the market in any significant manner. Though likewise, they should never significantly underperform either. What you are buying is consistency at a low cost, meaning these are great for novice and experienced investors alike.

We’ve written a full article on the pros and cons of Vanguard LifeStrategy Funds here

Which Vanguard Lifestrategy fund should I buy?

The choice of fund you choose will depend on your attitude to risk. Having more of your money tied up in equities (stocks and shares) is seen as a higher risk than investing in bonds, but may yield greater returns.

A generally accepted rule for equity allocation is to deduct your age from 100. This will give you your equity allocation.

For example, a 40-year-old investor would end up with a score of 60 (100 – 40 = 60 ). For them, this suggests a 60% equity allocation. So the Vanguard LifeStrategy 60 would be seen as a suitable investment.

As you get closer to retirement you would adjust your fund type down stocks wise and have a higher allocation of bonds. For example, Life Strategy40 or 20 may be more appropriate. This reduces the risk associated with stock market exposure.

Not sure of your attitude to risk? Take this short Vanguard Survey to see your ideal allocation of equities

Remember, do you own research and seek advice from a professional. Unbiased can put you in touch with a local Independent Financial Advisor for free.

Transfer your ISA to Vanguard

You can transfer an existing ISA or Junior ISA to Vanguard UK if you want to lower your fees. However, remember you can only invest in Vanguard funds. Any funds you hold in your current ISA will be sold and only the cash value transferred. Any existing Vanguard funds will be retained and transferred across.

There is a standard ISA transfer form to complete here. If you transfer an existing cash ISA it will automatically be turned into a Stocks and Shares ISA.

Vanguard UK Investor Platform – the downsides

While Vanguard provides an excellent low-cost platform and aggressively priced funds, there are some drawbacks to consider.

You can only invest in Vanguard funds. The Vanguard Investor platform only allows you to buy Vanguard funds. This is the drawback for investors who want to craft their portfolio or for Tesla fanboi’s who want to buy the latest tech company. If you want access to the whole market, check out our reviews on Hargreaves Lansdown, Fidelity and Interactive Investor.

No Mobile App. Vanguard does not have a mobile app for UK accounts. There is one for American investors but as yet nothing in the UK. Many would argue that this is actually a good thing as you shouldn’t constantly check up on your investments. By comparison, Hargreaves Lansdown offers an excellent app. Hopefully, this is only a temporary problem. This is the real world….get with the programme Vanguard!

The LifeStrategy funds have a heavy US weighting (or more than you think). As a UK investor, you may be surprised that in addition to a good chunk of UK stocks, the equity portion of the LifeStrategy is also weighted between 25-30% to US stocks. Yes, this provides you with exposure to some of the largest companies in the world. And yes, the US stock market has gained significantly over the last few years. But also, if (when?) this comes to an end, then the returns from your equities will be impacted.

Still not sure? Check out our guide on how to pick the best investment platform for you.

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How safe is Vanguard UK?

Typical investment management companies are owned by outside stockholders. These companies have to charge fees to pay their owners and feed their children, which can reduce investors’ returns.

At Vanguard, there are no outside owners and therefore no conflicting loyalties. The company is owned by its funds, which in turn are owned by their shareholders. Vanguard’s unique client-owned structure allows them to return profits to fund shareholders in the form of lower expenses. Low costs help clients keep more of their returns, which can help them earn more money over time.

Vanguard’s unique ownership structure is a safeguard in and of itself. In Vanguard’s own words: “Vanguard is structured as a “mutual” mutual fund company. Our interests are completely aligned with those of our clients. We never have to weigh what’s best for clients against what’s best for the company’s owners, because they are one and the same.”

In addition, Vanguard is covered by the Financial Services Compensation Scheme (FSCS). So the first £85,000 of your money is 100% protected. This is in line with most other UK financial institutions and these limits may change in the future.

Alternatives to Vanguard Investor

Vanguard Investor limits your investment choices to only Vanguard products. Lots of UK investors like the Vanguard funds due to their simplicity and low cost.

So by using an alternative platform, you can keep all of these benefits but also pick funds from other providers and individual stocks if you want.

Alternative investment platforms from Fidelity, Hargreaves Lansdown and Interactive Investor provide access to Vanguard funds as well as the rest of the market. These platforms do charge a slightly higher platform fee for this privilege, but if the choice is important to you then you can’t go wrong with either provider.

We’ve written a guide to help you choose the right investment platform here. It covers off the main differences and runs through some example portfolio sizes.

Vanguard UK review – the cheapest way to invest?

We’ve always loved Vanguard and their new UK offering is, overall, another winner in our eyes. You must, however, be comfortable with it’s limitations to Vanguard only funds and if you do take this product, you may wish to consider other investments/funds to balance your portfolio and spread your risk. As always, do your research and get advice.

Here’s to Financial Fitness

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.