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Vanguard FTSE Developed Europe ex UK ETF: July 2022 Update

In this update, Passive Investment Analyst Alex Watkins shares our analysis on the manager, process, culture, ESG Integration, cost and performance of the Vanguard FTSE Developed Europe ex UK Exchange Traded Fund (ETF).

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Please complete a quick survey to help us improve our ETF Research.

  • Vanguard is a pioneer in index investing, and created the first retail tracker fund
  • This ETF offers exposure to a broad range of countries and sectors across Europe
  • The fund’s low charges could help it track the FTSE Developed Europe ex UK index closely

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 All-World Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

FIND OUT MORE ABOUT ETFS

The Vanguard FTSE Developed Europe ex UK ETF offers a low-cost option for tracking the performance of the FTSE Developed Europe ex UK Index. The index offers exposure to a range of large and medium-sized companies in Developed Europe excluding the UK. The fund is heavily weighted in companies from France, Switzerland and Germany.

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 European market could be used to diversify a long-term global investment portfolio, including those focused on other regions such as the UK, US or higher risk emerging markets.

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 of 80 people. 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 around 8 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 Vanguard FTSE Developed Europe ex UK ETF tracks the performance of a range of companies as measured by the FTSE Developed Europe ex UK Index. The fund tracks the benchmark by investing in all the underlying companies of the index, and in line with each company’s index weight. This is known as full replication and can help the fund track the index closely.

The portfolio has a large weighting in France, Switzerland and Germany which make up 22%, 20.6% and 17.1% of the fund respectively. The portfolio is also highly concentrated in companies from the Healthcare, Industrials and Financials sector.

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 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 fund 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 £6.31 trillion of assets globally as of May 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 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 (Environment, 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.

For example, in Europe, Vanguard engages regularly with the car manufacturer, Mercedes. This includes meeting with company leaders, including discussions directly with the chair of the supervisory board. In their recent conversations, they sought to better understand the company’s governance policies and practices and how the supervisory board oversees risk.

As the Vanguard FTSE Developed Europe ex UK ETF tracks an index of companies, it does not specifically integrate ESG considerations into its investment process, and the fund therefore has the flexibility to invest in companies deemed to be sin stocks, such as weapons and alcohol producers.

Cost

The fund currently has an ongoing annual fund charge of 0.10%. This is one of the lowest cost ETFs for tracking the FTSE Developed Europe ex UK 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 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 FTSE Developed Europe ex UK ETF has tracked the FTSE Developed Europe ex UK since launch and the fund’s returned 67.71% versus the benchmark’s 73.22%*. 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.

The 10 biggest companies in the FTSE Developed Europe ex UK index currently make up 23.54% of the total index. How these companies perform will play a bigger part in the performance of the index and fund compared with some of the smaller holdings.

Over the last year, the FTSE Developed Europe ex UK index returned -10.17% to the end of June 2022. Oil & gas companies were the best performing during the year with the sector growing over 16%. This is partly down to the ongoing effects of the Ukraine crisis which has led to a surge in global oil & gas prices. However, the energy sector only makes up around 4.66% of the total index.

The worst performing sector over the year was technology, which returned -23.21%. Technology companies have been held back by rising inflation and interest rate rises. Often they’re known as ‘growth’ stocks and are expected to have higher earnings in future. But when interest rates rise, the value of these future cash flows decreases.

More broadly, Russia’s invasion of Ukraine continues to extend supply chain issues across the region. This continues to drive higher inflation and companies will likely endure higher costs. This could slow growth unless companies can pass on some of these costs on to consumers by raising the prices of their goods and services.

Given Vanguard’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the FTSE Developed Europe ex UK index well, though there are no guarantees. A glance at the five-year performance table below shows in some years the fund has tracked the index closer than others. Remember, past performance isn’t a guide to future returns, investors could get back less than they invest.

Annual percentage growth

Jun 17 – Jun 18 Jun 18 – Jun 19 Jun 19 – Jun 20 Jun 20 – Jun 21 Jun 21 – Jun 22
Vanguard FTSE Dvlp Eurp ex UK UCITS ETF EUR Dis 2.44% 7.51% 0.29% 22.50% -10.48%
FTSE Developed Europe ex UK TR GBP 2.92% 8.00% 0.70% 22.99% -10.17%

Past performance is not a guide to the future. Source: *Lipper IM to 30/06/2022. Figures to 30 June 2020 are the income units of the fund and 30 June 2020 to 30 June 2022 are the accumulation units where income is reinvested. This is due to when the accumulation units were launched.

More about the Vanguard FTSE Developed Europe ex UK ETF including charges

Vanguard FTSE Developed Europe ex UK ETF Key investor information

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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