Gleeson (pictured) is a proponent of actively managed funds and says he would only consider Vanguard trackers if he had a change of heart, due to their low costs and superior methods of replication. "Vanguard is the only passive house out there that exercises full replication all of the time," he explained.
"They buy every single stock in the index, and constantly trade them to ensure the right weightings are being used."
"This is very expensive, but because Vanguard are so massive, and use stock lending to offset trading costs, they are able to keep the total expense ratio (TER) extremely low, whilst tracking the index almost perfectly."
"They’ve really shaken up the market. In my opinion, there was absolutely no point in holding a tracker until they entered the market, because you would have been better off holding an ETF."
"However, now you have a selection of passives with a similar tracking error, without the derivative risks."
Gleeson explains that other tracker funds only exercise partial replication, which means that tracking error tends to be much higher.
He commented: "When you have indices with a lot of stocks – say the All Share – some groups decide to only partially track the index."
"They’d look to have the same sector weightings, but not necessarily buy all the stocks, in order to keep trading costs down."
"This is why over three years you see some trackers with a high tracking error match the returns of the index, or even outperform it in some cases."
"However, in the longer term these differences tend to accumulate."
This effect is shown very clearly in a study of FTSE All Share trackers over a three-year period.
Although many of Vanguard FTSE UK Equity Index’s rivals have come close to matching its performance, they all have a far higher tracking error and have fallen well short of the index in the longer term.
Performance and tracking error of funds and index over 3-yrs
| Name | 3-yr tracking error (%) | 3-yr returns (%) |
|---|---|---|
| FTSE All Share | N/A | 24 |
| Vanguard FTSE UK Equity Index | 0.41 | 23.65 |
| Aviva Inv UK Index Tracking | 0.99 | 18.45 |
| HSBC FTSE All Share Index | 7.03 | 22.38 |
| Scot Mut UK All Share Index | 7.16 | 24.08 |
| BlackRock CIF UK Equity Tracker | 7.17 | 23.02 |
| Allianz UK Index | 7.19 | 21.64 |
| Fidelity Moneybuilder UK Index | 7.2 | 21.45 |
| Skandia UK Index | 7.34 | 21.38 |
| M&G Index Tracker | 7.62 | 22.5 |
| L&G UK Index | 7.95 | 21.81 |
| Scot Wid UK All Share Tracker | 10.27 | 22.5 |
Source: FE Analytics
The Vanguard fund was only launched in June 2009, so has yet to achieve a five- or 10-year track record.
It has a TER of 0.15 per cent. The average FSTE All Share tracker has a TER of 0.71 per cent, while the most expensive – Halifax UK FTSE All Share Index Tracker – has a TER of 1.5 per cent.
For investors buying direct, all of the Vanguard funds have a minimum investment of £100,000; however, they are available for between £500 and £1,000 through the major platforms.
The popularity of trackers in the current environment is clear; according to FE inflows data, four of the top-six best-selling UK All Companies funds over one year are trackers, and a further three passive portfolios are among the top-20 best sellers.
Vanguard FTSE UK Equity Index is the sixth-best seller, with inflows exceeding £250m over the last 12 months.
However, FE Analytics data shows that BlackRock CIF UK Equity Tracker, Scottish Widows UK All Share Tracker and HSBC FTSE All Share Index have all sold more.