Vanguard FTSE 250 ETF April 2023 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 Global Aggregate Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

The Vanguard FTSE 250 ETF invests in 250 medium-sized UK companies. 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 some 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 largest index funds in the world. Given its size, it has a big 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 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 ETF.

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 should 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 just over $7.2trn of assets globally as of December 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 ETF 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 Environmental, Social and Governance (ESG) 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 also produces frequent insights on their engagement activity at both a corporate and governmental level.

Vanguard has recently left the Net Zero Asset Management initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.

The Vanguard FTSE 250 ETF tracks an index that does not specifically integrate ESG considerations into its process. The ETF can therefore invest in company shares issued by companies in any sector.

Cost

The ETF currently has an ongoing annual fund charge of 0.10%. 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 an index 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.

LEARN MORE ABOUT THE DIFFERENCE BETWEEN ETFS AND MUTUAL FUNDS

Performance

The ETF aims to track the FTSE 250 index and has done so well since launch, returning 50.80%* versus 52.93% for the index. As expected from an ETF, 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 close to the index. Past performance is not a guide to the future.

Over the last year to the end of March 2023, the FTSE 250 Index has fallen 7.88%* versus the fund’s return of -7.93%. The FTSE 250 Index has a smaller weighting to the oil & gas sector than the FTSE All-Share index, an area where companies have performed well over the last year. The lack of exposure to this sector within the medium and smaller companies’ index has meant that it missed some of the returns led by these energy companies which feature in the larger index.

The valuation of smaller companies is more reliant on future earnings growth and cashflows, so inflation and higher interest rates pose a bigger headwind to this section of the market than some others.

Given Vanguard’s size, experience and expertise, we expect the ETF to continue to track the benchmark well in the future, though there are no guarantees. A glance at the five-year performance table below shows that in some years the ETF has tracked the benchmark closer than others. Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2023.

FIND OUT MORE ABOUT THE VANGUARD FTSE 250 ETF INCLUDING CHARGES

VIEW VANGUARD FTSE 250 ETF KEY INVESTOR INFORMATION

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Our ETF research is for investors who understand the risks of investing and that investing in ETF's isn't right for everyone. Investors should only invest if the ETF's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of an ETF before they invest, and make sure any new investment forms part of a diversified portfolio.