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Low cost passive investment products gain traction for unique US firm


The UK’s Retail Distribution Review which shifted the adviser model from commission to fee based was one of the key drivers behind the 2012 launch of the Vanguard Group’s ETF range in London. 

Vanguard has been offering funds in the European markets for over 15 years but the move to the UK in 2009 came because Vanguard specialises in low cost passive investment products and, while it is a business that distributes through wealth managers and other intermediaries, it does not pay commission. 

Founded in the US in 1975, the firm has a unique structure. Tim Huver (pictured), senior Product Manager at Vanguard, explains that in terms of corporate structure, the firm is mutually owned by its fund shareholders, so any revenue is reinvested in the business and provided back to shareholders in terms of lower expense ratios.

“The benefit of investing in one of our funds is that we can build scale and our goal is to operate at cost so that the revenue goes back to the end shareholders” Huver says. 

Huver comments that one of the biggest dynamics at the moment is the idea of passively managed products at the expense of higher cost active products. “We are seeing increased flows” he says, citing the Investment Association’s figures which show that 23 per cent of retail net sales went to tracker funds last year, while in 2010 that figure was less than 7 per cent.

Along with flows into passively managed products, Huver also sees costs coming down across the industry. “Our asset weighted total expense ratio for ETFs is 10 basis points” Huver says. “Across the industry it is over 30 basis points, so there is room for the industry to come down.”

Vanguard keeps costs low across the range of products they offer and they do offer active funds – of the USD3 trillion they have under management, one third is in actively managed products. “We are happy with our progress in Europe as we continue to launch low cost products and see a great deal of adoption as a result” Huver says.

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