Note on 8/8/2016: The “catch” in this article is no longer true – there is no longer a special additional charge when investing in Vanguard funds, following changes following the RDR legislation. But Vanguard is still really cheap! See our most recent list of cheap trackers.
Not many fund firms have a fanbase but Vanguard does. Its cheerleaders are the Bogleheads, disciples of Vanguard’s visionary founder John Bogle – the man who brought index investing to the masses.
Passive investors are passionate about Vanguard for two main reasons:
1. It offers index funds at rock bottom prices.
2. The company has a hard-won reputation for serving investors’ interests.
Cheap index funds are the most important weapon in the armoury of a passive investor. An influential study by Morningstar concluded:
If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.
And since US-giant Vanguard entered the UK market in 2009, it has blazed a trail with a low cost range of index funds that rivals struggle to match.
If you’re investing for the long-term and you want a:
- Diversified fund-of-funds portfolio – Vanguard is the cheapest. 1
- Emerging markets index fund – Vanguard is the cheapest. 2
- UK Government bonds index fund – Vanguard is the cheapest. 3
The only problem is that you can’t just roll up to any online broker and start ordering Vanguard…
The Catch
Buying index funds used to be straightforward. You pick a fund from the investment platform of your choice and – if you choose wisely – you won’t get stung for dealing fees or annual administration charges.
Not so with Vanguard.
Vanguard funds are not yet freely available among UK brokers/platforms. Many initially refused to stock the funds because Vanguard wouldn’t pay them nice, cosy commissions just to play the game.
But Vanguard’s view of the world is gradually prevailing, as the UK financial industry is weened off commission by the Retail Distribution Review (RDR) shake-up.
That means Vanguard funds are turning up on more and more platforms.
Before you slap your money down though, you need to ensure two things:
- That you choose a platform that minimises the extra charges often levied on Vanguard (and increasingly on other funds) to claw back the loss of commission.
- That the platform stocks the Vanguard funds you want. Vanguard has the best range of index funds in the UK but many platforms only stock a limited selection.
Easy life
The simplest solution is to choose Vanguard’s LifeStrategy funds. These are fund-of-funds: a bumper pack of investments that offer a diversified, automatically rebalanced portfolio in a single wrapper.
It’s like buying a multi-pack of crisps except the Salt ‘N’ Vinegar option is flavoured FTSE All-Share, Cheese ‘N’ Onion is the rest of the Developed World, and Prawn Cocktail is the Emerging Markets.
If you follow this route then TD Direct currently offers the LifeStrategy funds without platform fees, management charges, dealing costs, or any other slippery trip hazard beyond the Total Expense Ratio / Ongoing Charge Figure, as long as your account is worth over £5,100 (ISA) or £7,500 (standard dealing account).
TD Direct also stocks a few of the other Vanguard funds – but far from all. If you want to choose from the full range then take a look at the likes of:
If your broker imposes dealing charges to trade Vanguard then look for a regular investment option that squeezes fees. A one-off trade costs £12.50 at Alliance Trust, but you can slash this to £1.50 by drip-feeding in via Direct Debit using its Monthly Dealing account.
Monthly Dealing doesn’t commit you to buying the same fund month-in, month-out. You can switch funds any time you like or even stop buying after just one trade.
If you want the full Vanguard range and you make more than eight monthly purchases a year (or sell even once) then Bestinvest trumps Alliance Trust (if you hold your funds in an ISA or standard dealing account).
Sippdeal comes into play for SIPPs. You can see a more detailed comparison of the three broker’s offerings here.
Complications
Hargreaves Lansdown carries the same (limited) fund range as TD Direct but there’s no way to duck its platform charges.
You’re only better off with Hargreaves Lansdown if you can’t make TD Direct’s no-charge minimums and you only hold one fund (in your ISA) or two funds (standard dealing account) or less than six funds (SIPP).
Capiche?
In fact, if your strategy is to hold one or two Vanguard LifeStrategy funds in a SIPP then go with Hargreaves Lansdown.
What about rival tracker providers? HSBC come closest to matching Vanguard’s range, especially with its new C Class index funds. Like Vanguard, these funds strip out trail commission payments and have dirt cheap TERs. If you can find them unencumbered by platform fees then they can match or beat some Vanguard funds.
Again, TD Direct is the place to look, and if you want a tie-breaker to decide between the rival ranges then compare tracking error.
Some Exchange Traded Funds (ETFs) can also give Vanguard’s funds a close run for their money, none more so than its own in-house range.
ETFs are subject to dealing fees and bid-offer spreads that make their bald TERs less advantageous than they first appear. But at the very least, it’s worth comparing Vanguard’s ETFs with their index funds, where they overlap, to make sure you get the best deal.
You’ll be able to buy Vanguard ETFs at virtually all brokers who offer London Stock Exchange ETFs. You should be able to pick them up for £1.50 a throw via a regular investment scheme.
Compare your options using a fund cost comparison calculator and insert the cost of dealing fees into the initial charge section.
The Red Herrings
You may get a fright if you read somewhere that the minimum investment in a Vanguard index fund is £100,000, according to some news reports and even the official prospectuses.
But happily that’s only true if you buy direct from the firm. There’s no minimum if you invest through an intermediary like a discount broker or online platform.
The other thing that can smell a bit fishy is Vanguard’s cost structure:
- A number of its funds charge upfront fees.
- Received wisdom says you shouldn’t pay upfront fees on index funds.
- Vanguard claims these fees are levied in the interests of transparency.
- It says its rivals bundle up these fees in inflated Total Expense Ratios (TERs).
The upfront fees cover fact-of-life items like trading costs and stamp duty. Vanguard’s point is that investors are left none the wiser about these charges if they are buried in the TER.
The bottom line is that, in most cases, Vanguard’s index funds still work out to be cheaper than rival offerings, over the long term, when you compare fund costs directly. What you lose upfront, you gain in pygmy-sized TERs. And the effect becomes more pronounced over time.
Though upfront fund costs should be taken into account, ultimately it’s the dealing fees that are make or break. Use the fund cost comparison calculator to help you decide whether Vanguard works best for you.
There’s no doubt that UK passive investors are faced with slim pickings compared to US coach potatoes when it comes to low cost index funds. But we were practically on prison food before Vanguard arrived.
Vanguard has given the market a shot in the arm, and if trackers are part of your mix, you owe it to yourself to take a look at its range.
Take it steady,
The Accumulator
Update note: This article was updated in mid-December 2012 to take account of the many developments since Vanguard first arrived in the UK. Comments below may refer to out-of-date information, so check the date of commenting!
Good reads from around the Web.
I know my co-blogger The Accumulator has a cult following among Monevator readers, but I never expected to see a financial product bearing his own name.
Of course I can’t be sure the money-amassing Accumulator
You’ve got to admit though that this fancy tube for collecting £1 coins does fit his mantra – it’s simple, cheap to run, and it can be operated by any DIY investor who has a pulse and the ability to save the odd £1 coin when holidaying in Bognor.
But I’m not going to take this lunge for fame lying down, rest assured. If The Accumulator can have a low-tech saving vehicle, then I think it’s time I finally launched my eagerly-awaited hedge fund.
The Investor’s Massively Asymmetrical Risk-Arbitrage Diversified Holdings Unit will invest in literally millions of distinct assets, each with their own bespoke characteristics.
And I can guarantee that there will be at least some people who are made into millionaires by the operation of my new hedge fund. (These people will be shown off at fancy City gatherings in order to convince more lucky punters to get into this great opportunity).
Of course, I shall be taking the customary 2% off investors for getting out of bed.
I shall also be gobbling up the quaintly traditional 20% of any profit made by my investors.
And how will it work? Oh, you don’t need to worry about that. It’s a black box, isn’t it? Trust me, I’m a soon-to-be rich hedge fund manager!
Okay, as you’re a loyal Monevator reader, here’s the skinny: Every week I will round up my investors’ money into a specially selected asset class that I have selected for return characteristics that are completely uncorrelated to the stock market.
In short, I will spend everyone’s money on lottery tickets – after my 2% take, of course.
Good reads from around the Web.
Here’s an interesting graph via Business Insider showing who owns the US stock market, and how that’s changed in the post-war period.
A few interesting things to notice – the still small impact of ETFs, the plateauing of hedge fund’s presence in the market, and the big retreat of pension funds.
But most revealing is the demise of ‘household’ ownership of equities:
It seems the individual investors who used to dominate ownership of the US market have largely thrown in the towel on buying shares themselves (although much of their allocation toward equities will now be in mutual funds).
When Warren Buffett was getting started in the 1960s, he was up against amateurs. Today any self-directed stock picker is playing against professionals.
For most people that’s a good reason to invest passively, but for one or two active diehards who think career risk dominates fund manager’s decision making, it might just be an opportunity. (The key word being ‘might’!)
DIY is RIP
Felix Salmon doesn’t see those private investors coming back. Writing for Reuters, the blogger notes that real money share trading volumes are still falling, as shown in this graph:
‘Real money’ is mainly what we think the stock market is about – someone making a decision to invest their money in a specific company – as opposed to passive flows from ETFs or the frantic shuffling of high-frequency traders.
And such volumes are way down.
Perhaps this is because everyone has become a long-term buy-and-hold investor, savvy about the perils of over-trading?
Hardly. Salmon is surely right when he ventures:
I think that what we’re seeing is the slow death of the stock-market investor — the kind of person who subscribes to Barron’s, idolizes Warren Buffett, and thinks of stock-market investing as a do-it-yourself enterprise.
During the dot-com bubble, lots of people thought they were really smart when it came to stock-market investing, and then after the dot-com bubble burst, the rise of discount brokerages helped encourage new people to step in to the market and try their luck.
But:
Nowadays the message is sinking in: it’s a rigged game, you can’t win, and you’re better off with a passive strategy.
I’d agree with that, except for his use of the word ‘rigged’.
And except for the fact that I do personally invest a lot of my money actively – even though I think passive investing is best for nearly everyone, very likely including me!
When you’re investing in a bear market, it’s easy to forget that share prices can go up as well as down.
This daily volatility scares people off during bull markets, too. It can be hard to watch your net worth fluctuate according to the whims of Wall Street (which is one reason I believe it’s better to focus on your portfolio income).
At least this volatility is potentially making you richer – provided you’re trickling money in regularly over the long-term.
With so-called dollar-cost averaging, you buy more shares when they’re cheaper and less when they’re expensive. The volatility actually improves your returns.
Mike at Oblivious Investor created this three-minute video showing the maths:
Would you say ‘No’, if a complete stranger handed you £200 a year with no strings attached? How about £100? £50?
That’s why I use credit cards. The right ones insist on giving me free money for the privilege of sitting in my wallet and funding purchases that I’m going to make anyway.
By smartly slaloming through the system, you can pick up special offers and free coins like Super Mario gobbling power-ups, and so earn a bit extra every year.
As long as you can follow the credit card house rules (see below) you merely need to choose the right tool for the job.
A credit card for every occasion
Whatever kind of credit card you’re after, it’s out there. Of course, we don’t want the loan advancing, wage-slavery inducing variety.
Here is a quick guide to the savvier weapons of choice:
Cashback cards
A small percentage of your spending is returned to you every year in cash. You should accept no less than 0.5% cashback and can earn up to 5% with a bit of extra effort. A 1% cashback rate would earn you £100, if you spend £10,000 that year.
Reward scheme cards
The same deal as cashback credit cards, but your pounds equal points and points mean prizes. Prizes like free flights, shopping vouchers and so on. Compare reward schemes versus cashback cards to see which is more worthwhile.
0% spending cards
Credit cards can fund a cheeky little saving scheme known as stoozing. You spend as usual but on a card that offers 0% interest on new purchases. Make the minimum repayments on the card every month and save your accumulating cash in the best instant access savings account. Just before the 0% period expires, use the money saved to pay off the debt. The interest earned equals your profit.
Overseas spending cards
Spend abroad on commission-free credit cards to get the best exchange rates possible. It’s a lot easier than wandering around with a money-belt stuffed full of local currency – the international expression for “mug me”.
Special offer cards
Here some glittering freebie dangles like bait to hook you onto an otherwise uncompetitive card. Take the bait, do the bare minimum to bag the bonus, then ditch the card like Jerry mouse eluding the ponderous Tom again.
A few house rules on credit cards
Credit cards are great as long as you follow the rules.
The number one rule is do not get into debt. If you run up a debt on a 0% card, for example, it should be matched by savings elsewhere. This way you remain debt neutral, since your savings offset your liability.
Do not fall into the credit card debt trap! Lenders hope that by giving you this ‘free’ money, you will eventually get sloppy, skip payments, and become another debt sucker. Don’t risk credit cards unless you’re as anally retentive about avoiding debt as a German politician in Athens.
Decided to sally forth to claim your share of lolly? Here are some rules I live by:
Choosing a credit card
- Don’t apply for lots of cards when you’re in the market for a loan you actually need. Credit checks lower your credit score. I try to avoid more than one application every other month.
- Card fees are OK as long as you spend enough to make sure the offer is still worth it. Maths and budget planning are required.
- Jump in quick if an offer is good. Cashback deals can last for years on legacy cards, even when they’re closed to new customers.
- Partners are handy if you want to revisit new customer offers. (This is not the only use for partners, I believe).
Spending on credit cards
- Put as much of your spending as possible on (your carefully selected) credit cards to maximize your returns…
- …but only spend what you would have done anyway.
- Don’t withdraw cash on your card. You’ll pay fees.
- Don’t put recurring payments on your credit card e.g. subscriptions. They can be hard to stop. Use direct debits instead.
Managing your balance and credit limit
- Always pay off the outstanding balance in full every month by direct debit to avoid paying interest. (Except if you’re using a 0% card to stooze.)
- Don’t exceed your credit limit. You’ll lose bonuses, pay fees, and generally wreck your upside.
Hacks and hints
- Tippex a stripe on any credit cards that look similar to your debit card to avoid mix ups at cashpoints when you’re not paying attention.
- Double the power of an offer by putting a loving partner on your account to increase spending. (See? I knew there was another use for them!)
- Remember you can claim money back from your card issuer if something goes wrong with any item you’ve bought costing more than £100. A handy feature in these days of failing retailers and online shopping.
Again, there’s no shame in deciding you’d rather not take the risks of credit cards.
Wheezes like these are tasty extras for hardcore money hackers. They’re not essential for sound financial planning.
The best credit cards
The following cards are all highly competitive in their specialist category, at the time of writing.
You may well find offers that suit your circumstances better, depending on where you shop and the lavishness of your budget, so do hunt around.
Oh, and when choosing between simplicity and exception-riddled complexity, I’ve plumped for simplicity every time.
Cashback credit cards
Aim for a card that bags a cashback rate of 1% or better a year.
Favourite for cashback
Aqua Reward Credit Card
Cashback: 3%
Max payout: £100 (spend £3334 to max the cashback)
Annual fee: 0
APR: 34.9% (representative)
Issuer: Mastercard
Best feature The amazing 3% rate.
Worst feature Low initial credit limits (most applicants get £250 – £500).
- Beat the low credit limits by paying off your account balance early. Spend £200 on the credit card, then make a £200 payment to your Aqua account via your bank. Don’t wait for the direct debit.
- It’s aimed at consumers with a poor credit history or none at all, so it’s pretty easy to get.
- Also best for spending abroad.
For a spending splurge
Barclaycard Cashback Credit Card
Cashback: 6% for first 3 months, 0.5% – 2% after that
Max payout: £120 for the first 3 months. £75,000 annual spend limit
Annual fee: £24
APR: 24.6% inc fee (representative)
Issuer: Visa
Best feature 6% cashback on your five biggest purchases of the month, for the first three months, if you make 15 purchases in the month.
Worst feature It’s complicated. See below.
- Your top five monthly purchases earn 2% cashback after the 6% rate expires.
- Except for your anniversary month when the top five rake in 4%.
- You need to make 15 purchases a month to get the boosted cashback rate.
- Monthly purchases beyond your top five earn cashback at 0.5%.
After Aqua
American Express Platinum Cashback Credit Card
Cashback: 5% for first 3 months, 1.25% after that
Max payout: £125 at the 5% rate. Unlimited thereafter (spend £2,500 to max the 5% cashback)
Annual fee: £25
APR: 18.5% inc fee (representative)
Issuer: Amex
Best feature 5% introductory rate for new customers. Great when you’re about to spend big.
Worst feature Amex is not accepted by some retailers. Always have a back-up card if you go the Amex route.
- 2.5% cashback for your anniversary month, if you’ve spent over £10,000 in the previous year.
- Minimum household income of £20,000 required.
- The cashback return is still good in year two (near enough 1%), if you spend over £9,000 a year.
Alternative to Amex
Capital One Aspire World Credit Card
Cashback: 5% for first 3 months, 0.5% up to £6,000, 1% £6-10,000, 1.25% above £10,000
Max payout: £100 at the 5% rate. Unlimited thereafter (spend £2,000 to max the 5% cashback)
Annual fee: 0
APR: 19.9% inc fee (representative)
Issuer: Mastercard
Best feature 5% intro rate for new customers. Good for the Xmas run-up or other big spending period.
Worst feature Complicated cashback tiers.
- Minimum household income of £20,000 required.
- The year two cashback return only closes in on 1% if you spend over £20,000 per year. The cashback rate is 0.7% for a £10,000 spend.
The commuter’s choice
Santander 123 Cashback card
This tricky little number is well worth a look if you spend over £100 a month on petrol, rail travel, or London Oyster cards, or you can’t stay out of places like John Lewis and Debenhams.
Rewards and flights
For those who demand their backhanders in goods and services.
Favourite reward card
Amazon.co.uk Credit Card
Reward: Amazon vouchers
1 point = 1p
Annual fee: 0
APR: 16.9% inc fee (representative)
Issuer: Mastercard
Best feature Essentially a 1% cashback card. It goes up to 2% when shopping on Amazon as £1 spent there equals 2 points.
Worst feature Can be beaten by rival rewards cards if you spend BIG at Tesco or Sainsbury’s.
- Earn 3 points for every £1 spent in the first 90 days.
- £5 Amazon voucher just for passing the trial-by-application-form.
Favourite free flights card
Lloyds Duo Avios Credit Card
Intro bonus: 18,000 Avios points
Miles: 1 for every £1 spent (on the Amex version)
Annual fee: 0
APR: 17.9% (representative)
Issuer: Amex and Mastercard
Best feature Relatively simple, and good if you’re a low earner.
Worst feature There are better cards if you don’t mind fees but they need a massive spend.
- The duo bit means you get an Amex and a Mastercard. Amex is better for miles.
- Convert Tesco Clubcard points into Avios points.
- 18,000 point intro bonus if you apply before April 3 2013 and spend £500 per month in the first three months.
Stoozing credit cards
To best arbitrage interest rates, you need plastic that combines a long 0% spending stint with rewards thrown into the bargain.
Remember: There will still be minimum monthly repayments. Set up a Direct Debit to ensure you make them!
Favourite 0% spending card
Tesco Clubcard Credit Card
0% on spending: 16 months
Min repay: Greater of 1% of balance plus interest or £25
Reward: Tesco Clubcard points
Annual fee: 0
APR: 16.9% (representative)
Issuer: Mastercard
Best feature Other than the 0% period, Money Saving Expert calculates that the Clubcard points make this a 0.75% cashback credit card.
Worst feature A relatively high min repayment, but it’s no biggie.
- Collect 1 point per £4 spent (£4 min).
- Also counts as a Tesco Clubcard. So if you shop in Tesco, you get your Reward points, plus your Clubcard points (and bonus points on Tesco fuel).
- Exploiting Tesco Clubcard points is a science in itself. As usual the Money Saving Expert guys are all over it.
Alternative stoozing card
M&S Credit Card
0% on spending: 15 months
Min repay: Greater of 2.5% or £5
Reward: 0.5% back in M&S vouchers
Annual fee: 0
APR: 15.9% (representative)
Issuer: Mastercard
Best feature As well as the 0% period, you get 0.5% back in M&S vouchers as a reward – that’s doubled to 1% for any spending done in M&S.
Worst feature No issues to report.
Prolong the stooze: Instead of paying off the debt when the 0% spending period expires, you can shift it to a 0% balance transfer card. It’s a stay of execution on the debt, enabling you to carry on racking up interest in your savings account. This only works if the balance transfer fee on the new card is less than your savings account interest rate (after tax). Remember to keep servicing the minimum payments and don’t put any new purchases on the 0% balance transfer card – it’s unlikely to give you 0% interest on new spending. You can keep deferring pay-back day like this for a while, though eventually large debts could hurt your credit score. At some point, you’ll need to take the money out of your savings and start again.
Cheap travel money
We’re after a specialist credit card that doesn’t tack commission onto its foreign exchange rates.
Favourite travelling companion
Aqua Reward Credit Card
Commission: Europe 0%, World 0%
Cash withdrawals: Fee: 3% (min £3),
Cash interest: Yes, even if paid off in full
Annual fee: 0
APR: 34.9% (representative), Cash: 39.95% – 59.95%
Issuer: Mastercard
Best feature 3% cashback even abroad.
Worst feature The low credit limit (most applicants get £250 – £500).
Alternatively
Halifax Clarity Credit Card
Commission: Europe 0%, World 0%
Cash withdrawals: Free,
Cash interest: Yes, even if paid off in full
Annual fee: 0
APR: 12.9% (representative), Cash: 12.92 – 21.95%
Issuer: Mastercard
Best feature Free cash withdrawals. Still best to avoid though as you’ll pay interest regardless of direct debit settings.
Worst feature No concerns.
- You get £5 cashback per month for spending over £300, if you also have a Halifax Reward Current account.
Special offers
Grab the shiny thing, then toss the card away.
Quick hit and run
Barclaycard Freedom Rewards Credit Card
Freebie: £30 shopping voucher
Condition: Earn 10,500 points by spending £500 in the first 3 months.
Annual fee: 0
APR: 18.9% (representative)
Issuer: Visa
Best feature Low hurdle freebie and good range of retailers.
Worst feature The reward scheme is complex and points are generally worth less than half a penny each.
- Earn 1 point for every £1 spent. 2 points at supermarkets and petrol stations and 3 points with certain retailers.
Eyes on a bigger prize
American Express Preferred Rewards Gold Card
Freebie: £100 gift card or BA flights
Condition: Spend £2,000 in the first 3 months
Annual fee: £125 (free in first year)
APR: It’s a charge card. £12 fee if you don’t pay the balance off
Issuer: Amex
Best feature Fly to major European capitals or spend the gift card in the likes of Amazon or M&S.
Worst feature You pay taxes on the flights. Around £30 per person.
- Spend £2000 in three months and you’ll earn 20,000 Reward points to spend on the freebie of your choice.
- Cancel the card so you don’t cop the big fee in year 2.
- Two complimentary airport VIP lounge passes.
- Double points on travel, petrol and supermarket spending.
- Min household income of £20,000.
Closing credits
So that’s our pick of the best credit card deals available. We hope you find a useful flexible friend among that lot. If anyone has a better choices then please let us know below and we’ll add it in.
Do remember we are not financial advisers. The above pointers are not any sort of personal recommendation as to what you should do. The only thing we’d recommend to everyone is do your own research.
Take it steady,
The Accumulator
