Last Updated on 8, February 2017
Vanguard is the world’s most famous index fund provider.
Vanguard came to our office a few years ago but nothing happened after that. My problem with them is that their funds required a whopping minimum of USD 100,000 or EUR 100,000. It is impossible to construct a diversified portfolio with such a large entry level. Moreover, their funds were not on any of the platform. So, it was impossible for me or any financial advisers to do any rebalancing and switching. So I did not consider their products for a long time.
Recently I discovered that Vanguard funds entry level has dropped to USD 20,000! It seems this was so for a year already. I really wonder why there was no advertisement nor announcement to financial advisers about this. Vanguard is well known for its low-cost index funds. Perhaps due to their low cost, they could not afford to advertise.
So why are Vanguard funds so well known? There are two main reasons.
The first reason is because they are simple funds. No shorting, putting and futures. These funds are invested into a large basket of stocks weighted at the same percentage as the index it is trying to follow. Similarly, for bond funds.
The second reason is because it outperforms majority of the active managed fund. This has to do with its indexing strategy. Vanguard funds are passive funds. They just follow the index. Empirical evidence has shown that majority of active managed funds underperform the index on the long-run. Hence, if you can ‘invest’ in the index, you do better than majority. Of course, it is not possible to invest in the index. But you can invest in a fund that tries to mimic the index. Due to the Vanguard’s super low cost structure, their performances are extremely close with the indices.
I just randomly picked three Vanguard funds to demonstrate how low cost these funds are:
|Name||Expense Ratio||Typical Expense ratio of others|
|Vanguard Global Bond Index Fund||0.15%||0.6% - 2%|
|Vanguard US 500 Stock Index||0.10%||1% - 2%|
|Vanguard Global Stock Index Fund||0.25%||1% - 2.5%|
You may have fainted for a while after seeing how low cost these funds are. I am glad you are continuing reading after you fainted!
Performance of Vanguard funds against its peers
I decided to generate a table of performance to measure Vanguard funds against its peers. These funds are all available in Singapore. I will be using just 3 Vanguard funds for this illustration.
The first fund I want to use is the Vanguard Global Stock Index Fund. I generated a performance table which can be view HERE. This table requires some explanation. The table contain a list of similar funds. Their returns for 1 month, 3 months, 6 months, 1 year, 3 years, 5 years and 10 years are shown. Normally we only focus on the mid-term performance namely 3 to 5 years return because short-term returns tend to be ‘noisy’. Long-term performance may not be meaningful as the historical returns reflect skills of fund managers who may have already resigned.
For each historical period, there are two sub-columns labelled as “%” and “Qtl” representing accumulative returns and quartile ranking. The accumulative return is in Singapore dollar with dividends reinvested net of taxes.
When a fund is ranked 1, it means the fund is within the top 25% of all the funds being compared. A ranking of 4 means the fund is at the bottom 25%. To make the reading more presentable, blue highlight means rank 1 and pink color means rank 4.
The table is also sorted by the 3 years return.
It can be seen that the Vanguard Global Stock Index is on the 1st quartile for 3 and 5 years period. Considering there is no superstar fund manager managing the fund, this kind of performance is just amazing.
Let’s look at Vanguard Global Bond Index Fund. The entire performance table can be view HERE. This fund is the 1st quartile for 3 and 5 years return. Not only that, it is the 2nd highest performing fund compared to its peers!
Let’s look at Vanguard US 500 Stock Index. The entire performance table can be view HERE. Once again, it can be see that the fund is ranked 1st quartile for 3 and 5 years periods. Interesting, almost all the 1st quartile funds are index funds. For those who are sharp eye will notice that many of these index funds did better than the index itself – which is mathematically an impossibility. So how could this happen if it is mathematically not possible to have any alpha in a passive fund? This probably require another blog for another day.
By the way, my investment clients can view a daily update on the funds ranking similar to what was shown above but across more regions and asset classes at this link: HERE.
Before anyone jump into the pool to purchase the Vanguard funds, I am required to produce the following disclaimer for the purpose of compliance since I am a financial adviser and that specific products were mentioned.
Disclaimer: Past performance of the Funds and any past performance, prediction, projection or forecast on the economy or markets are not necessarily indicative of the future or likely performance of the Funds.
Update 8 Feb 2017: The minimum investment amount has been lowered to US$1000!! The minimum amount for Regular Saving Plan is also lowered to US$100!! Faint!!
Like this article? Subscribe to my newsletter below for more.