Bringing value to investors means, in large part, maintaining the lowest possible charges across all of our products. This includes exchange-traded funds (ETFs), which is why investors across the world have entrusted us with more than $2.2 trillion¹ in ETF assets alone – more than a quarter of all the client assets we hold.

ETFs are much like other funds, except for one key thing: they trade like shares, on stock exchanges. As such, you can buy or sell them in real time—during market hours—and know the price you have traded at more quickly. The flipside is the added trading cost – the commission you pay on each live trade (which on the Vanguard platform you can avoid by opting for the ‘next available price’ and using our twice-daily bulk trading service)².

Vanguard was an indexing pioneer when it launched the first index fund for retail investors back in 1976, in the US. In Europe, we launched our ETF range in 2012. Over the rest of this article, we explain how our ETFs work.

Global experience and expertise

Our global presence and scale 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 countries³. 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 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. And with our tools, we seek to keep our ETFs’ tracking errors⁴ tight relative to their respective benchmarks to maintain the efficiency of our investors’ portfolios.

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.

Helping to lower fees for investors

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 ratio⁵ 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. But our peers still have some catching up to do given the average asset-weighted expense ratio of Vanguard’s own US-based funds shrunk to 0.09% from 0.68% over the same period⁶.

Now in Europe, we’re seeing a favourable trend 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 (OCF⁷).

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 (0.14 percentage 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.

Europe asset-weighted ongoing charges figure

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 our range with new funds covering fixed income and ESG 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.

Beyond the low cost, look at performance

Providing good value, of course, is about more than just charging lower fees. It’s also about delivering performance. And on that score, our ETFs also score well. Since their launch 10 years ago, our ETFs have performed better than their peer group 68% of the time, net of fees⁸- although past performance is not a reliable indicator of future results.

Performance - Vanguard ETFs vs industry in Europe

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. 

 

¹ Source: Vanguard, as at 31 March 2022.

² For more on the difference between ETFs and mutual funds, read ‘How to invest, part 5: ETFs or mutual funds’

³ Retail investors in the UK have been able to invest in Vanguard’s European ETF range directly through our Vanguard Investor platform since its launch on 16 May 2017.

⁴ Tracking error is a technical term that describes the divergence in the price performance between a market index and a fund tracking that index.  

⁵ An expense ratio reflects how much a fund or an ETF pays for portfolio management, administration, marketing and distribution, among other expenses. It is almost always expressed as a percentage of the fund's average net assets (instead of a flat amount).

⁶ Sources: Vanguard, Morningstar, Inc., and Lipper, a Thompson Reuters company.

⁷ As reported under MifID II. The ongoing charges figure (OCF) covers administration, audit, depository, legal, registration and regulatory expenses incurred in respect of the funds. 

⁸ Vanguard calculations based on Morningstar data.