I’ve heard that Vanguard enjoys a good reputation for charging very low annual fees on their index tracking funds. As I see it, that’s great, because the lower the fee, the more of the profit comes to me.
Vanguard’s Mutual Funds
You can find a list of Vanguard’s funds here.
I looked over the range and liked the look of their Global Small-Cap Fund – it would offer some diversification to my SIPP portfolio. The Total Expense Ratio (TER) was just 0.4% – not bad for worldwide exposure to small companies, albeit mostly in North America and Europe.
When I looked at Vanguard’s website, however, I found a catch – just one, but it’s a big one. Vanguard require a minimum of £100,000 to buy into one of their funds. That puts their funds out of reach for most of us, certainly out of my reach.
However, I noticed that Sippdeal, who I have already have a SIPP (Self Invested Pension Plan) with, offer a regular investment option in Vanguard Funds to their clients.
BUT, this time there wasn’t just one catch, there were two. Firstly, an initial investment of £100,000 was still listed as a requirement. Secondly Sippdeal apply a custody charge to holdings of Vanguard Funds of £12.50 per quarter.
Vanguard Funds weren’t for me.
Still searching for low fee investment funds, I returned to the Vanguard website and looked at their ETFs (Exchange Traded Funds).
ETFs are similar to mutual funds/unit trusts except they are bought and sold on the stock market.
Importantly, there’s no minimum investment, so although I couldn’t afford to buy into a Vanguard Fund, I could afford Vanguard ETFs. Unlike investment trusts and normal company shares, there’s no stamp duty to pay when you buy shares in an ETF.
Vanguard’s ETFs are listed here.
You can see that the Total Expense Ratio (TER) for the S&P 500 ETF is outstandingly low just 0.09%. I’ll probably invest in this at some time in the future.
I also liked:
- The Vanguard FTSE Emerging Markets ETF (Ticker VFEM). The TER is 0.45%. It invests passively in companies in the relevant FTSE Emerging Markets Index. In addition to hoped for capital growth, the current yield is 3.1%.
- The Vanguard FTSE All-World ETF (Ticker VWRL). The TER is 0.25%. It also invests passively and has a current yield of 2.9% in addition to potential capital gain.
Buying an ETF – not as easy as buying a normal fund
When you buy a fund – whether it be called a mutual fund or a unit-trust, you place the order and that’s the end of it. You pay the price determined by the fund manager.
When you buy an ETF, since you’re dealing on the stock-market, there are two ways you can place an order for your shares. This comes about because there are two prices quoted – the bid price and the offer price.
Your choice is to buy at the best available price that sellers are offering or you can try to buy at a price you have set.
1. Buying at the best available price
This means you pay whatever price is being asked for by the sellers. When I looked at my trading account a few minutes ago, the price being asked by sellers for Vanguard’s All-World ETF (Ticker VWRL) was £35.98 a share while buyers were offering £35.84. The difference between these two prices is only 0.3%. If I were buying these shares today, I’d be inclined to place a “buy at best” order because the bid-offer spread is so low.
I actually placed a “buy at best” order to see the deal I would be offered. (You get 15 seconds to accept the offer. If you do nothing, your offer lapses and no deal takes place.) Here’s the deal I was offered:
As you can see, the price I was offered was £35.94 per share. This is actually lower than the £35.98 price offered by sellers. The reason for the difference is that the image above was a real-time quote, whereas the bid and offer prices are 15 minutes delayed. It looks like the price sellers were prepared to accept fell a little in the 15 minutes between quotes.
If I had been in the market for shares in this ETF today, I would have accepted the trade shown in the image.
If you would like to see live prices rather than 15 or 20 minute delayed prices, Google Finance does the business for you. Here’s their data for Vanguard’s All World ETF: Ticker VWRL.
2. Trying to buy at a price you have set
The Vanguard ETFs are rather thinly traded. On some days very few trades take place. When this happens, the difference between the bid and offer can sometimes rise to 2,3 or even 4%.
You can place an ‘at best’ order (which you won’t execute) to see the terms you’ll be offered. On quiet trading days, they can be a long way from what anyone is prepared to pay. There’s a wide gulf between the buy and sell prices.
In these ‘quiet day’ circumstances, I’m inclined to place a Limit Order – an order with a price limit set which I’ve set.
Let’s say the offer price was £40 but I didn’t want to pay any more that £39. I would select the Limit Order option on the trading screen and enter £39. If anyone wanted to sell at best, provided there were no Limit Orders higher than mine, I would get the shares.
You can see a limit order has been selected for a purchase of shares in the Vanguard Emerging Markets ETF on the image below.
Example of a Sippdeal trading screen for a Limit Order
Vanguard ETFs didn’t have the disadvantages for a small investor that their mutual funds have. I’m now the owner of Vanguard ETFs.
You need to remember that these ETFs are rather thinly traded, so sometimes the difference in prices offered by sellers and bid by buyers can become rather large.
Patience may be required to buy or sell at a fair price. Meanwhile, the market may move in the wrong direction, meaning the price moves further away from your desired price.