Vanguard FTSE 250 ETF: May 2022 update

• Vanguard is a pioneer in passive investing, and created the first retail tracker fund
• This ETF provides exposure to a range of UK medium-sized companies
• A low-cost way to track the performance of the FTSE 250 index

How it fits in a portfolio

An ETF is a basket of investments that often includes company shares or bonds. They tend to track the performance of an index such as the FTSE 250 and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

Find out more about ETFs

The Vanguard FTSE 250 ETF invests in 250 medium-sized UK companies. Smaller companies tend to experience more extreme share price movements than larger ones. This could boost long-term growth potential but increases risk.

These businesses make more of their money domestically, so they’re less reliant on foreign economies than some of the larger companies in the UK. That said, the FTSE 250 Index also includes investment trusts, some of which invest in overseas markets and provides the fund with international diversification.

A tracker fund is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. ETFs that focus on the UK’s medium-sized companies could be used to diversify a long-term global investment portfolio, or one focused on larger companies or other investments such as bonds.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the biggest index funds in the world. Given its size, it has a large investment team with the expertise and resources to help its ETFs track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global investment team of 80. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the fund. As a collective team, Vanguard has run this ETF for over seven years.

Vanguard also has a trading analytics team, which is responsible for ensuring the ETFs buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs could help the ETFs track their benchmarks as closely as possible.

Process

This ETF aims to track the performance of medium-sized companies in the UK, as measured by the FTSE 250 index. It does this by investing in every company, and in line with each company’s index weight. This is known as full replication, which should help the fund track the index closely.

Reducing costs is a key part of keeping the performance difference between the ETF and the benchmark to a minimum. In any index tracker fund, taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. To help keep these costs down, the team aims to make large investments in companies instead of lots of small transactions.

The ETF also has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by Vanguard on a daily, weekly and monthly basis to ensure the fund is closely following the index.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can reduce the costs for investors, though this adds risk. Vanguard will only lend securities to a limited number of approved dealers. They also indemnify the ETF against any loss from this process, meaning there should be no negative impact on investors.

Culture

Vanguard is currently the second largest asset manager in the world and runs £6.2 trillion of assets globally as of March 2022. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual stocks which may beat them.

The team running this ETF works closely with other equity research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add support and challenge on how to run the fund effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it has offered exclusions-based passive funds for many years, it has lagged peers in offering passive funds that explicitly integrate ESG (Environmental, Social and Governance) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team, which consists of over 35 people, carries out most of the firm’s voting and engagement activity. Its stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation and shareholder rights.

As the Vanguard FTSE 250 ETF tracks an index of companies, it does not specifically integrate ESG considerations into its investment process, and the fund may therefore invest in companies deemed to be sin stocks, such as gambling and weapons companies.

Cost

The ETF has an ongoing annual fund charge of 0.10%. This is currently one of the lowest cost ETFs for tracking the FTSE 250 index on the HL platform. There are no charges from HL to hold ETFs within the HL Fund and Share Account. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 in the ISA and £200 in the SIPP). Ensuring a tracker fund has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, buys and sells are subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The Vanguard FTSE 250 ETF has tracked the FTSE 250 index well since launch on 30 September 2014. Over this time the fund has returned 60.89%* versus the benchmark’s 63.07%. As expected from a tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the team have helped to keep performance as close to the index as possible.

The FTSE 250 index currently has significant exposure to sectors such as Financial Services, Industrials, Consumer Discretionary and Real Estate. Therefore, these sectors could currently have the biggest impact on the market’s performance, though the makeup of any index can change over time.

Over the last year, the FTSE 250 has fallen 5.92% to the end of April 2022. The FTSE 250 has a smaller weighting to the oil & gas sector than the FTSE 100, an area where companies have performed well over the last year. The lack of exposure within the medium and smaller companies’ sector has meant that the index missed some of the returns led by these energy companies.

Given Vanguard’s size, experience and expertise running ETFs, the fund could continue to track the FTSE 250 index well in future, though there are no guarantees on how it will perform. A glance at the five-year table below shows that in some years the fund has tracked its benchmark closer than others. Remember, past performance isn’t a guide to future returns.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2022.

Find out more about the Vanguard FTSE 250 ETF including charges

View Vanguard FTSE 250 ETF Key investor information

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