Our Pick Of The Best Vanguard ETFs (2024)

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Vanguard is a leading company in the world of investing, with approximately £6 trillion of client assets under management. The company has become one of the biggest asset managers in the world thanks, in part, to its lineup of simple, low-cost funds and ETFs.

It also offers Target Retirement funds (which aim to increase exposure to lower-risk assets as the target retirement age approaches) and LifeStrategy funds (categorised by the split of equities to bonds). These are ‘funds of funds’ meaning that they hold other Vanguard funds, rather than the underlying bonds or shares in a company.

Vanguard’s ETFs track the performance of an index or benchmark, such as the FTSE All-World Index for equities or the Bloomberg Euro-Aggregate Corporates Index for bonds.

In total, Vanguard offers 29 ETFs across bonds and equities and different geographies. Whereas fund managers of ‘actively-managed’ funds aim to outperform the benchmark by stock-picking, ETFs are ‘passively-managed’.

This means that they typically charge lower annual fees than their active counterparts which can make a significant difference to the value of a portfolio over time. Vanguard’s ETFs typically have an annual fee of around 0.1% to 0.2%, compared to 0.4% to 0.6% for its actively-managed funds.

Vanguard’s ETFs track the performance of a specific index as closely as possible by buying all, or a representative sample, of the underlying shares or assets. As a result, the ETF will rise and fall in line with the underlying index.

For example, the ETF tracking the FTSE 100 index would buy all of the underlying shares in the companies in the index. As the FTSE 100 is weighted by market capitalisation, the fund would hold a higher proportion of the largest-cap shares (such as AstraZeneca, Shell and HSBC).

Vanguard offers a wide choice of ETFs, including:

• Equities: by geography (the UK, US, Europe, Asia Pacific, emerging and global markets) and by market-cap (FTSE 100 and 250)
• Bonds: government and corporate bonds
• ESG (environmental, social and governance): ESG-compliant equity and bond funds.

When choosing an ETF, a Vanguard spokesperson points to the following criteria: “Things to consider include the “tracking difference” (how closely does the ETF follow the index it’s meant to track), liquidity (how easy, and therefore cheap, is the ETF to trade), and how diversified it is – how many of the underlying securities (whether stocks or bonds) is it invested in?

We researched the range of Vanguard ETFs available to UK investors, focusing on fees, performance and ratings. Full details are set out in the methodology below.

All data is sourced from Vanguard.

The yield is calculated as annual distributions (as at the date shown) divided by the current price of the ETF. It is a proxy for the annual income that investors might receive if they bought the ETF at the current price.

The ongoing charge figure (OCF) is the annual fee charged to customers for managing the ETF.

The ETFs were initially filtered by length of track record. This excluded the ESG ETFs as they have been launched within the last two years. Any ETFs not having at least a silver Analyst Rating on Morningstar were also removed.

This left a shortlist of just under 20 funds. As diversified portfolios typically contain both bonds and equities, we selected our pick of two bond and three equity ETFs.

The bond ETFs were selected on the basis of the following criteria:

• Morningstar Analyst Ratings (gold and silver) and star ratings (see below for further details)
• Trustnet quartile ranking for cumulative 1, 3 and 5 year returns (which compares the fund’s returns against the other funds in its sector)
• Annual cost (ongoing charges figure)
• 5 year cumulative returns
• Current yield

The equity ETFs were selected using the following criteria:

• Morningstar Analyst Ratings (gold and silver) and star ratings (see below for further details)
• Morningstar 5 year risk ratings
• Annual cost (ongoing charges figure)
• 5 year cumulative returns
• Morningstar 3 year volatility scores (measuring the variation in returns)
• Current yield

The Morningstar ratings are decided as follows:

• Morningstar Analyst Ratings: this is a forward-looking analysis with ratings from gold to negative. Gold-rated funds are seen as the ‘best of breed’ and are expected to outperform their benchmark and/or peer group over a period of at least the next five years. This includes an analysis of the risk taken, fund expenses and the skills of the fund manager.
• Morningstar star ratings: this is a measure of the fund’s risk-adjusted return, relative to similar funds. It is calculated by subtracting a risk penalty from the fund’s total returns, penalising funds with a greater downward variation in monthly returns. The top 10% of funds receive 5 stars, the next 22% 4 stars, the middle 35% receive 3 stars and so on.

While the Morningstar Analyst Ratings are forward-looking, other measures (such as returns and volatility) are based on historical data. Past performance is not a reliable indicator of future performance and investors should conduct their own research before deciding whether to invest.

As with all investments, investors may make a loss from owning Vanguard ETFs if the index, and therefore the price of the fund, falls.

However, ETFs may be considered a good investment for the following reasons:

• Diversification: ETFs provide exposure to a diversified portfolio, which is typically lower risk than owning shares in individual companies. Vanguard also offers a range of different ETFs with bond funds typically being lower risk than emerging markets equities, for example.
• Low cost: ETFs typically have lower fees than actively-managed funds, which can have a significant impact on long-term returns.
• Historical performance: over 60% of passive funds outperformed their active counterparts last year, according to research by Morningstar. ETFs may offer investors the opportunity to make gains if stock markets or other indices rise, and vice versa.

That said, investors should consider their investment objectives, horizon and appetite for risk before deciding whether to invest.

ETFs offer a means of diversifying portfolios across different types of assets, including equities and bonds which have different risk and reward profiles.

Equities and bonds have historically been a good hedge, with bonds often rising in price as equities fall. However, bond markets fell steeply in 2022, leading to equities and bonds falling together for the first time in more than 25 years.

In light of recent market uncertainty, we asked James Norton, head of financial planning at Vanguard, for his thoughts on creating a diversified portfolio.

Mr Norton comments: “There is a very long-term benefit to diversifying a portfolio with equities and bonds. Markets go up and down, bond markets don’t go up and down as much but they do go up and down and it’s a core part of investing.

“It’s really important not to be short term about it. Last year was very unusual. The average 60:40 portfolio (60% equities, 40% bonds) was down by around 10% last year, which was a sizeable fall.

“But if you look over five years, they’ve been up about 25% including that loss. Whereas cash might have made 5% if you’re lucky. Even taking into account that kind of material loss, investing has been worthwhile.”

Vanguard ETFs can be bought directly from Vanguard or via an investment platform.

ETFs are priced ‘live’, as with shares in companies, so investors can buy or sell when stock markets are open for trading.

For investors buying funds directly from Vanguard, the minimum investment is £500 for a lump-sum and £100 for monthly investing.

However, some of the trading platforms offer minimum lump-sum investments of £100 or lower for investors buying Vanguard ETFs, and £25 per monthly for regular investing.

It’s also worth bearing in mind the following fees charged by investment platforms:

• Trading fee: this is usually £5-10 for ETFs (although some platforms charge no trading fee).
• Annual platform fee: this is the cost of holding the ETF on the platform. Some platforms charge a percentage-based platform fee (typically 0.25% to 0.45%), some charge a flat platform fee and some charge no platform fee. However, many platforms cap the annual platform fee payable on ETFs.
• Fund management charge: this is charged by the fund manager and, as discussed earlier, is generally around 0.1% to 0.2% for Vanguard ETFs.

Tax treatment depends on one’s individual circ*mstances and may be subject to future change.

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

Investors using the Vanguard platform will pay a trading fee of £7.50 for ETFs using live prices (no fee for using the bulk buying service). Vanguard charges an annual platform fee of 0.15%, capped at £375 for portfolios over £250,000.

We’ve looked at fees, amongst other things, in our pick of the best trading accounts, our pick of the best Individual Savings Account (ISA) providers and our pick of the best Self Invested Personal Pension (SIPP) providers.

There can be substantial tax benefits of holding a Vanguard ETF in a ‘tax-efficient wrapper’ such as an ISA or SIPP as these are free from income tax and capital gains tax. The personal allowance for capital gains has fallen to £6,000 in the current tax year (and will fall to £3,000 for the following 2024-2025 tax year).