Vanguard FTSE Developed Europe ex UK ETF: May 2024 update

• Vanguard is a pioneer in index investing and launched its first ETF in 2001

• This ETF provides exposure to hundreds of companies across Europe, excluding the UK

• Since launch, the ETF has tracked the FTSE Developed Europe ex UK Index closely

How it fits in a portfolio

An ETF is a basket of investments that often includes company shares or bonds. They tend to track the performance of an index such as the FTSE Developed Europe ex UK Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

The Vanguard FTSE Developed Europe ex UK ETF offers a low-cost option for tracking the performance of the FTSE Developed Europe ex UK Index. The index includes a range of large and medium-sized companies across developed markets in Europe but excluding the UK.

An ETF is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. ETFs that track stock markets in Europe could help diversify a global portfolio or one focused on smaller companies or bonds. As the ETF doesn’t invest in any UK companies, it could sit alongside UK funds to provide some balance to a portfolio.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the largest index funds in the world. Given its size, it has a big investment team with the expertise and resources to help its ETFs track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the ETF. As a collective team, Vanguard has run this ETF for nearly 10 years.

Vanguard also has a trading analytics team, which is responsible for ensuring the ETFs buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs should help the ETFs track their benchmarks as tightly as possible.

Process

This ETF aims to track the performance of the FTSE Developed Europe ex UK Index. It does this by investing in every company in the index and in the same proportion. This is known as full replication and helps the ETF track the index closely.

The ETF is currently made up of around 440 companies spread across 15 countries in Europe but excluding the UK. France, Switzerland and Germany made up the largest portion of the ETF at the end of March 2024, at 23.0%, 18.2% and 17.2% respectively. The industrials, financials and healthcare sectors account for just over half of the ETF.

Reducing costs is a key part of keeping the tracking difference between the ETF and the benchmark to a minimum. In any ETF, factors like taxes, dealing commissions and spreads, and the cost of running the ETF all drag on performance. To help keep these costs down, the team aims to make large investments in companies instead of lots of small transactions.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can be used to offset some of the costs. They will only lend securities to a limited number of high-quality approved dealers. They indemnify the fund against any loss from this process, meaning there should be no negative impact on investors. However, stock lending is a higher risk approach.

As this ETF is listed offshore investors are not usually entitled to compensation from the UK Financial Services Compensation Scheme.

Culture

Vanguard is currently the second largest asset manager in the world and runs around $8.6trn of assets globally as of March 2024. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual companies which may beat them.

The team running this ETF works closely with other equity research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the ETF effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it has offered exclusions-based passive funds for many years, it has lagged peers in offering passive funds that explicitly integrate Environmental, Social and Governance (ESG) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team carries out most of the firm’s voting and engagement activity. Their stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation and shareholder rights. The Stewardship team produces frequent insights on their engagement activity at both a corporate and governmental level.

Vanguard courted controversy in 2022 when it left the Net Zero Asset Managers’ Initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. It claimed its decision would improve clarity for investors and allow it to speak independently. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.

The Vanguard FTSE Developed Europe ex UK ETF tracks an index that does not specifically integrate ESG considerations into its process. The ETF can therefore invest in shares issued by companies in any sector.

Cost

The ETF currently has an ongoing annual fund charge of 0.10%. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 p.a. in the ISA and £200 in the SIPP). There are no charges from HL to hold ETFs within the HL Fund and Share Account or HL Junior ISA. Ensuring an index fund has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

Since launch in September 2014, the ETF has tracked the FTSE Developed Europe ex UK Index tightly. As is expected from a tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved. However, the management tools used by Vanguard have helped to keep performance as close to the index as possible.

Over the last 12 months, the ETF has tracked the index well and returned 8.54%*. Poland’s stock market delivered strong returns but only makes up a small portion of the ETF, which means it doesn’t have a big impact on overall performance. Denmark and Italy have also been among the top performing stock markets in Europe over one year. In Denmark, pharmaceutical company Novo Nordisk, which makes up two-thirds of its market, performed well thanks to the popularity of its diabetes drugs in the US. Whereas Portugal, Finland and Switzerland delivered negative returns.

In terms of sectors, financials contributed the most to the ETF’s performance over the year, followed by technology and industrials. Consumer goods was the key detractor from performance. This reflects the performance of the underlying index, which the ETF aims to match.

Given Vanguard’s size, experience and expertise running ETFs, we expect the ETF to continue to track the FTSE Developed Europe ex UK Index closely in the future, though there are no guarantees. A glance at the five-year performance table below shows that the ETF has seen both positive and negative returns, which are in line with the index. Remember, past performance isn’t a guide to future returns.