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Vanguard takes ETF lead

Passive investment specialist Vanguard Asset Management has introduced a range of five Dublin-domiciled exchange traded funds that are trading on the London Stock Exchange.

The new ETFs are all physically backed. This means they invest directly in securities that make up their respective indices, so do not track synthetically using derivatives. The company chose to replicate the indices physically because it sees this model as straightforward and easy to understand.

The total expense ratio of the five ETFs vary between 0.09 per cent and 0.45 per cent, with the cheapest being Vanguard S&P 500 ETF and the Vanguard FTSE emerging markets ETF the most expensive. Vanguard’s S&P 500 and FTSE 100  ETFs are cheaper than most equivalent products from other ETF providers that are active in the UK market.

iShares has a TER of 0.4 per cent for its FTSE 100 and S&P 500 ETFs, while HSBC’s ETF range offers a S&P 500 ETF at the same TER as Vanguard, but a higher TER of 0.35 per cent on its FTSE 100 ETF. The db X Trackers range has a FTSE 100 ETF with a 0.3 per cent TER and a choice of S&P 500 ETFS with TERs of 0.2 per cent and 0.3 per cent, but these products are not physically backed and track the index using a type of derivatives contract known as a swap.

The other ETFs in the Vanguard range are more unusual, as many ETFs that are aimed at UK investors track MSCI indices for emerging markets and global equities. The ETFs are run in the same way as Vanguard’s passive funds, with both offering a low-cost way to access broadly diversified stock and bond investments.

Research by Platforum recently found that advisers expect to increase exposure to passive investment strategies over the next six months, which may indicate demand for Vanguard’s new fund range. Some advisers who want to implement low-cost passive strategies for clients may prefer simple tracker funds rather than ETFs. Others may opt for ETFs such as Vanguard’s because they can be traded on an exchange like shares, with the diversification of tracker funds.

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