Vanguard UK Gilt ETF: November 2022 update

How it fits in a portfolio

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

FIND OUT MORE ABOUT ETFS

The Vanguard UK Gilt ETF offers a low-cost solution for tracking the performance of the Bloomberg Sterling Gilt Float Adjusted Index. The index offers exposure to a range of UK gilts (government bonds) with varying maturities greater than one year.

An index 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 track the gilt market could be used to diversify an investment portfolio that’s focused on shares or corporate 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 funds track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team. 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 10 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 ETF track its benchmark as closely as possible.

Process

This Vanguard UK Gilt ETF tracks a range of UK government bonds, also known as gilts, as measured by the Bloomberg Sterling Gilt Float Adjusted Index. The fund tracks the benchmark by investing in all the 52 underlying bonds, and in line with each bond’s index weight. This is known as full replication and can help the fund track the index closely. An ETF that invests solely in gilts increases its concentration risk, as performance is reliant on one type of investment.

Around a quarter of the ETF is invested in gilts with 1–5 years until maturity. More broadly, the ETF is made up of gilts ranging from one year to 25 years until maturity.

Reducing costs is a key part of keeping the tracking difference between the fund and the benchmark to a minimum. In any index tracker fund, factors like taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance.

Vanguard does not lend securities in this ETF to other providers in exchange for a fee. However, they may do this in other ETFs.

Culture

Vanguard is currently the second largest asset manager in the world and runs just over $7trn of assets globally as of October 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 fixed income research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good 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 60 people, carries out most of the firm’s voting and engagement activity. Their 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.

The Stewardship team produces frequent insights on their engagement activity at both a corporate and governmental level. Investors can also access fund-by-fund proxy voting records, although voting rationales are not provided. That said, voting and engagement case studies can be found in the firm’s annual and semi-annual Investment Stewardship reports.

As the Vanguard UK Gilt ETF tracks an index of government bonds, it does not specifically integrate ESG considerations into its investment process.

Cost

The fund currently has an ongoing annual fund charge of 0.07%. 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 p.a. in the ISA and £200 in the SIPP). Ensuring a passive fund has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The Vanguard UK Gilt ETF has tracked its index well since launch in 2012. It’s returned 2.25%* over that time. 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 managers have helped to keep performance as close to the index as possible. Past performance is not a guide to the future.

Bond markets, including the Bloomberg Sterling Gilts Index, performed well from the fund’s launch until 2021, which benefited the fund’s performance.

However, bond markets have faced headwinds over the past year, mostly in the form of rising inflation and interest rates, which make the future value and income paid by bonds look less attractive. The now defunct ‘mini-budget’ in late September exacerbated concerns and saw the price of gilts fall further. As a result, over the last year to the end of October, the fund fell 25.63%.

Gilts don’t typically suffer such severe price movements and what bond investors have experienced throughout 2022 is rare in recent history. That said, that doesn’t mean it won’t happen again, given the environment of high inflation and interest rate rises.

Bond yields move in the opposite direction to prices, so gilt yields have increased over the course of the year. The yield for the Vanguard UK Gilt ETF was 1.69% as of the end of September 2022. Bond yields are not guaranteed and can change over time.

Given Vanguard’s size, experience and expertise running index tracker funds, we expect the ETF to continue to track the Bloomberg Sterling Gilts Index well, though there are no guarantees on how it will perform.

A glance at the five-year performance table below shows in some years the fund has performed better than others. Remember, past performance isn’t a guide to future returns, investors could get back less than they invest.

Past performance is not a guide to the future. Source: *Lipper IM 31/10/2022. Figures to 31 October 2019 are the income units of the fund and from 31 October 2019 to 31 October 2022 are the accumulation units where income is reinvested. This is due to when the accumulation units were launched.

More about the Vanguard UK Gilt ETF including charges

Vanguard UK Gilt ETF Key Investor Information

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