Best Exchange Traded Fund Provider: Best of the Best 2018


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It is no wonder that Vanguard wins the best exchange traded fund provider this year. It is the greatest disruptor of the investment world.

In the 1970s, Vanguard founder Jack Bogle took on Wall Street's high-fee, high-turnover active investment managers when it offered a low-fee, low-turnover index funds.

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The $5.9 trillion group hasn't stopped disrupting the poor practices of the investment world and changing the way people invest.

While other investment groups are run by investment bankers who focus on their own bloated salaries and firm's profits, Vanguard focuses on its clients.

And investors benefited again in November 2017 in Australia when Vanguard launched four diversified ETFs, with different levels of risk. While diversified funds aren't new - there are hundreds of unlisted multi-sector managed funds available - Vanguard's four are the first for the listed ETF landscape in Australia.

What is revolutionary is the cost. Investors can get instant diversification for a low 0.27%pa for all diversified ETFs. This is at least a quarter of the cost of the average fee for a multi-sector managed fund, which Morningstar's research team says is 1.09% for conservative, 1.14% for balanced, 1.41% for growth and 1.31% for high growth.

This means $100,000 invested in a diversified balanced fund earning 7%pa before fees will turn into $191,468 over 10 years with a fee of 0.27% but only $175,406 with a fee of 1.14%. That's a difference of just over $16,000.

In a low-return investment world, costs matter. It helps people's savings compound faster so that they can reach acvhiev their dreams, whether it's an education, a home deposit or retirement.

Investors can tap into Vanguard's already established diversified unlisted index funds, with collective assets of more than $7 billion. Each fund holds different levels of assets - Australian shares, international shares, small companies, emerging markets as well as cash, local and international fixed interest.

These index funds have a great track record, consistently ranking in the top quartile of performance with their peers over three, five and 10 years, according to Morningstar.

"They are terrific products for all investors, particularly for self-managed super funds as they offer diversification when SMSFs are heavily concentrated in Australian equities and cash," says Daniel Reyes, the head of investments for Asia-Pacific at Vanguard based in Melbourne.

Investors don't have to worry about getting their asset allocation right as they benefit from Vanguard's investment experts continuously assessing the portfolio's exposure and periodically rebalancing it back to the right level of risk.

The recent Noble Prize winner, behavioural finance and economics professor Richard Thaler has written about how hard it is for investors to make rational decisions, particularly about rebalancing.

"Some investors are better off in default products," says Robin Bowerman, principal, market strategy and communications at Vanguard.

Vanguard is a company that is passionate about doing what is right for their clients by focusing on continuous improvement by delivering the lowest-cost and highest-value investments. "We are constantly balancing the two," explains Reyes, who describes working at Vanguard as "really rewarding" because it is always thinking about what is right for the client.

As Vanguard's assets grow, it passes on the economies of scale by lowering its fees. And costs continue to reduce. In 1975 the average expense ratio for the Vanguard funds was 0.89%. With $5.9 trillion in fund assets, Vanguard has dropped the average fund expense ratio to 0.12%.

"We really try to get people to focus on costs more than everyone else," says Reyes.

Over the past year, Vanguard has cut the fees on four ETFs and six index funds. No wonder Vanguard is Money's winning ETF provider. Vanguard won six ETF categories this year: first place for its Australian and international shares ETF, income and specialty fund ETFs as well as second and third place for its international ETFs.

The four new ETFs take Vanguard's total ETF offering in Australia to 22. "The Australian ETF market is maturing but it is by no means mature yet," says Reyes.

Reyes would like to see ETFs get a lot more attention from Australian investors. He wants investors to keep the bulk of their investments in low-cost, diversified ETFs. There is a proliferation of new ETFs that follow a structured index, that aren't diversified and can have high fees, just like managed funds.

"You really do need to understand the underlying nature of the ETF landscape. Do your due diligence and be careful. If you don't understand it, walk away."

Vanguard is launching three global quantitative active ETFs in coming months which Reyes says can be beneficial for investors to have in their "toolkit". The fees (0.45%) will be a third of the typical actively managed funds fees.

Vanguard's active funds globally have performed well with 96% of funds outperforming their industry peer group over the past five years and 93% outperforming over the past 10 years.

Impressive numbers

  • Jack Bogle started the Vanguard Group in the US in 1975 and a year later launched its first index fund. Vanguard Australia commenced operating in 1996 and is 21 years old this year. 
  • Vanguard is one of the world's biggest investment groups with total global funds under management of $5.9 trillion. Of this Vanguard Australia's total funds under management is more than $120 billion. 
  • Globally more than $1 trillion is invested in Vanguard ETFs. Almost $9 billion is invested in the ETFs listed on the ASX.
  • Vanguard Australia has 22 ETFs products - five Australian equities, seven international equities, six fixed income and four diversified.

See more from Best of the Best 2018 here or grab the December issue for full coverage.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.