Best Vanguard Funds UK

Vanguard has disrupted both UK funds and platforms for the better forcing competitors to lower their fees or lose customers but you don't have to be on vanguard's platform to buy their funds which begs the question which are the best Vanguard funds and that's what we address in this video now don't forget if you do enjoy our content please do subscribe to our Channel and like this video it helps us a lot so let's look at the best UK Vanguard funds in a bit more detail to find what's best we have to have a handle on what's good now normally we think about high returns when we think about investing but that's not all we have to think about we might also consider what risk you have to take to generate that return ideally you'd want a higher return with a low risk and also what we don't want is for fees to eat away our returns so we'd also go for low-cost funds if possible now it's not just the management fee of the fund which matters it's also the holding fee to hold it on a given platform which varies widely so we'll consider that also when considering our total cost of ownership now let's look at some returns for Vanguard funds beside me here you can see the last decade of returns for the Vanguard funds which have been around that long and these returns are annualized there's no surprise that the US is the best performer that's generated about 15 returns over that decade and any fund which also contains a lot of U.S stocks like this developed World X UK fund about 60 percent of that is U.S stocks that's also performed very well but notice that we also have things like Global small caps they tend to outperform over the long term and over the last decade that's certainly been a pretty good performance Japan has also put in a pretty good Innings you can see that it's generated over nine percent per year on average then we get to the UK all share which has generated 7.8 percent and you can see that Emerging Markets have actually been quite disappointing over this period generating less than six percent the lowest returns tend to come in the fixed income category because bonds don't tend to generate good long-term returns we buy those more for safety than we do for return and if we're talking about safety we'd consider a risk measure like volatility for example that's what we can see on this risk return plot so the y-axis here is returned with low returns at the bottom High returns at the top and the x-axis is risk as measured by volatility which is the typical annual percentage price move very volatile funds tend to be more risky than the ones which have low volatility because they tend to crash more so ideally what we'd have is a fund with low risk and high return but unfortunately as you can see there aren't any of those what we can see is that the safest funds with the lowest volatility are here on the left and these are all fixed income funds they buy bonds but they certainly pay the price in terms of return notice how they're load down on the y-axis then we've got this unfortunate group of funds over here which have high risk and low return in other words the worst of Both Worlds that includes two fixed income funds remember that fixed income has been completely crushed over the course of the last year as interest rates increased and funds were the longest duration have the highest volatility and have lost the most over this period of time so that's long duration guilt that's UK government bonds and long duration UK inflation linked guilds which also have a very long duration but we also have emerging market stocks here which as we saw have also done very badly over the last decade in terms of return and as we saw previously the US and developed World X UK and small caps have certainly had very good return turns but also came with very high risk now that doesn't necessarily mean that these will generate the best returns in future in fact it means quite the opposite now let's turn to life strategy which is kind of like a One-Stop shop for building your portfolio and that's because it already contains everything it contains Global Equity Global bonds and it's dialed up in terms of risk from Life strategy 20 up to life strategy 100 according to how much stocks it contains the more risk you take generally the higher the return you should expect such that life strategy 100 which is all stocks has generated the best historic returns and that's over the 12 years since these funds have been around what's kind of interesting over the last year though is that despite life strategy 20 containing a lot of bonds which are supposedly safe because those bonds have sold off so much it's actually well below its all-time high whereas life strategy 100 is already pushing new all-time highs so why wouldn't I consider life strategy funds to be the best ones available from Vanguard well this is why beneath me here you can see the composition of Life strategy 100 in terms of the funds which it buys itself which are other Vanguard funds now what I've done is to add up the contribution from all the UK stock funds which are in life strategy 100 so that's the foot to UK all share the ftse 100 which are large caps and the ftse 250 which are mid caps now if we compare that with the global index like the msci all country World index you can see that the UK only makes up four percent in fact less than four percent of that index because the UK is a very small Equity Market it's smaller than Apple in fact so what we see with live strategy is a huge overweight of 6.5 times what you'd expect if you simply waited based on the size of the UK market now that would be okay if the UK were to be expected to outperform massively however I think that's unlikely given its poor historic performance so this is one reason why I think I'd probably avoid life strategy in any of its forms because of the huge UK overweight now I've made previous videos in which I showed how to reproduce the returns of Life strategy funds but using other funds offered by Vanguard why would you do that now for starters it's much cheaper the fee is only 0.12 percent rather than 0.22 of course you have to rebalance yourself which you don't have to do with live strategy but what you can do is dial down that UK overweight and allocate more to Global Equity now if you're a member of pension craft you get access to a spreadsheet which gives you all of those weights it also shows how you can use ishares funds to make an even cheaper version of Life strategy you also get access to lots of other goodies like members only videos but also the chat application slack so you can ask a question whenever you want if you want to learn more about that just click on the link beside me and in the disc description beneath me so much for historic returns how about future returns nobody knows what these are but let's hear what Vanguard thinks they'll be this is from their 10-year Outlook and it has a model which predicts what's going to happen to various asset classes over that decade these are nominal returns so they're not adjusted for inflation but they are total returns so it's assuming you reinvest your dividends now over this period of time despite the UK being quite cheap Vanguard doesn't expect it'll outperform funds outside the UK the UK is expected to return 5.6 per year whereas Global X UK Equity will return 7.1 considerably more but what's also interesting is that Vanguard expects Emerging Market Equity unhedged to generate 8.2 which is even higher that's partly because Emerging Markets are very cheap at the moment but also presumably because Vanguard thinks they'll grow earnings more rapidly than elsewhere if we look at the US Outlook which is different from the UK one you can see that if we split things into U.S Equity versus ex-us Equity because the US is so expensive relative to other markets Vanguard thinkers will underperform over the next decade so x-us it expects Equity to generate 8.4 percent per year whereas U.S Equity will only generate 5.7 percent according to their model switching back to the UK Outlook we can see the forecast for fixed income funds bond funds are also looking pretty attractive for example Emerging Markets Sovereign bonds are expected to generate 7.2 percent which is equity-like returns and UK corporate bond funds which are investment grade high credit quality will generate 6.1 percent according to the model Global Credit without any Sterling hedge will generate 5.8 and even boring old UK government bonds will generate 4.3 percent and that's one of the benefits of having higher yields now it generates a higher income in fact even cash is expected to generate 4.2 percent on average now what's also interesting and which leads to one of my gripes later on is that the very strong dollar is expected to reverse calls Vanguard thinks that the US dollar will weaken AS Global risk appetite improves and equities go higher so if it decomposes the US return and Compares it with all country World index return excluding the US the reason why it thinks excluding the US increases the return is partly because the US is expensive that adds almost one percent to the xus index earnings growth is expected to be stronger in the US so that subtracts 0.7 percent excluding the US dividend yield favors xus because the US is usually very stingy when it comes to dividends but a huge 1.2 percent will be added to the xus index by not having that dollar weakening effect so ideally what we'd like is to either be able to buy stocks globally excluding the US to avoid their weaker returns but also the effect of the weakening dollar or to be able to buy Global Equity but hedged into Sterling so then the dollar effect will not affect us now what's great about Vanguard funds is they tend to have low fund management fees now if we do look at the passive funds which are offered by Vanguard these are the ones which you just track an index and don't try to beat it the fees tend to be very low the total expense ratio is what you can see here and even for the most expensive one it's less than 0.3 percent per year the dash Red Line you can see is what I gauge to be expensive for a UK fund and the ones which do tend to be expensive are the ones which buy assets in illiquid markets where trading costs tend to be high so that would include things like small cap stocks Emerging Market government bonds or even Emerging Markets stocks the things which you can see at the bottom which are the cheapest are from the most liquid markets and from developed markets so that's development market stocks but also develop Market government bonds so I think Vanguard really excels here in offering low-cost funds not always the lowest but certainly amongst the lowest in any category now one of the things that Vanguard stresses is is that it doesn't just offer passive funds it also offers a suite of active funds where the game is that the fund manager is trying to beat the market rather than copy the market unfortunately with Vanguard as with other active fund managers you can see that the fund fees are very high here all but one of them which is their money market fund are above the point two percent which I consider to be expensive so personally I'd avoid these expensive active funds on their platform and I don't think any of these would make it into my preferred best list for Vanguard funds now the total cost of ownership of a fund isn't just a management fee but also how much it costs to hold it on a given platform to see what I mean let's consider an example where we just have one fund and we either hold it on vanguard's platform or we hold it on an alternative platform like interactive investor and here I'm assuming we've got an Isa an individual savings account and on interactive investor we're going to use their investor plan now the cost of that is 9.99 a month which adds up to 120 per year but crucially it's a fixed fee which doesn't vary according to how much you own on the platform vanguard's fee is a percentage fee but it's capped at 375 pounds a year and that has really important consequences so let's say you're only going to buy say 10 000 pounds worth of this fund on vanguard's platform you'll pay a fee of 0.15 times 10 000 that's 15 pounds per year not much at all all whereas on interactive investor you'd still be paying 120 per year so Vanguard would be much cheaper if we increase the amount we hold to 80 000 well now we've matched interactive investors fee of 120 pounds per year so the fee on both platforms will be the same now I haven't considered transaction fees which you do have to pay on interactive investor and which you don't pay on Vanguard assuming you don't deal in real time with an ETF but if we increase the amount now to 250 000 well now you can see that vanguards hit its cap which is 375 per year but if you look at the interactive investor it's still 120 because the fee doesn't change so once we cross that threshold of 80 000 pounds you can see that interactive investor becomes cheaper and if we take it up to a million pounds invested well vanguards hit its cap of 375 but that's always going to be higher than 120 per year on internet active investor so the key take home here is that it's not always cheapest to buy Vanguard funds on its own platform it's often cheaper to buy them on another platform you can buy the same stuff you'll just pay less to hold it and that leads me on to the gripes I have with Vanguard now in my core portfolio I've only got two funds one is a global Equity Fund one is a global bond fund but what's really annoying is that there's no cheap Global Equity Fund which is an accumulation fund that automatically reinvests its dividends instead I had to choose a fund which was developed X UK which we'll see later which did have a low fee but which excludes emerging markets and the UK which is not something I necessarily wanted to do why would you not offer that on your platform it's the most basic building block of any portfolio I just don't get why they've excluded it given the fact that their own Outlook expects the US to underperform over the next decade why don't they offer an X U.S Global fund the only alternative is to make up a global index with lots of other funds which is really annoying if your own Outlook says that that's what you should do then maybe you should make a fund to do it also another alternative is to have a sterling hedged U.S fund that way the currency effect which will be a drag on returns according to Vanguard wouldn't be a problem but again no sign of it on their platform personally I think there are lots of opportunities outside stocks and government bonds so why not offer a High Yield Corporate Bond Fund there are some real opportunities there when that market crashes but I can't buy it on their platform and the only hedge which worked over the course of the last 12 months would have been some kind of commodity fund but again you can't find one on vanguard's platform now these aren't esoteric weird funds these are fairly standard so I think Vanguard should offer them and so finally let's turn to what I consider to be the best funds offered by Vanguard in the UK now if you filter on vanguard's platform based on global Equity Funds and they have to be accumulation funds because they reinvest the dividends that's what most people want and I also want passive funds because I don't want the fee to be too high you get these five funds now remember I said that I have just two funds on my core portfolio which I hold on Vanguard and now this is one of them I chose the one with the lowest fee of 0.14 the other funds all have fees of more than 0.2 percent now ideally I'd have liked to fund HSBC offers one for example which has a fee of 0.12 but a fund which is global which includes the UK and Emerging Markets but Vanguard don't offer one so I think the best Global one is this one the developed World X UK Equity index fund and the fee for that is 0.14 I also have a global bond fund and again I chose the cheapest one on which is This Global Bond Index Fund it's another accumulation fund the fees 0.15 I didn't want to get a short-term Bond Index Fund because I think at the moment now that yields are higher you'll probably be better off with something which has slightly more duration because the income tends to be higher so that would be my choice for bond fund now I know some people like dividends so if you're in that camp then I think the ftse all World High dividend yield ETF is probably one of the better ones the fee is a little bit higher 0.29 percent you often see that with high yield funds but what I like about this fund is that it's Global so it does give you Global diversification while still offering a fairly High dividend so there we are those are my favorite funds offered by Vanguard and the criteria I'd use to choose them now your criteria might be different so just use this as a kind of starting point for your own research now don't forget our offer if you want to join our membership and have access to that spreadsheet that lets you copy and adjust the weight of a life strategy like portfolio you can do that by clicking on the link beside me and in the description beneath me to learn more and as always thank you for listening

Channel: PensionCraft

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Keywords: best vanguard funds uk, best vanguard index funds, best vanguard index funds uk, investing, lifestrategy fund vanguard, pension craft, stock market, vanguard, vanguard etfs 2023, vanguard funds uk, vanguard index funds, vanguard index funds uk, vanguard investments, vanguard lifestrategy, vanguard portfolio uk, vanguard uk, vanguard uk best funds, vanguard uk portfolio, vwrl

Id: _ZDlPWb8mfQ

Length: 18min 40sec (1120 seconds)

Published: Sat Feb 18 2023