Trap for young players

By Slow Dad - January 16, 2017

Index tracker fund management fees may not stop at the Ongoing Charge Figure. Read the fine print, and beware of entry charges and dilution levies.

OCFs may not be the only fund fees charged

If you spend more than 30 seconds reading anything in the Personal Finance blogosphere you’ll stumble upon somebody evangelising about Vanguard’s low cost range of index tracker funds. To give credit where credit is due, my own research has found they are one of the more competitive and better performing fund providers. Your mileage may vary, so as always do your own research.

My research also recently turned up a trap for young players.

Beware the gap between fund OCF fees and the total fees charged
Beware the gap between fund OCF fees and the total fees charged
All the Vanguard managed funds charge an Ongoing Charge Figure, which can otherwise be thought of as the management fee the provider charges investors to do the actual index tracking, keep score on who is entitled to what dividends, and so on.

In the United Kingdom the OCF fee Vanguard charges ranges from as low as 0.08% up to 0.38%.

What surprised me a little when I was reading through the small print is investors in some of the funds get stung for one of more additional fees and charges over the OCF. These extra charges don’t get factored into the comparison tables at Morningstar or TrustNet, so they are easily overlooked by unwary investors who don’t read the small print.

Managed Fund fees don't stop withe OCF

easily overlooked by unwary investors who don’t read the small print
For example the Vanguard FTSE U.K. All Share Index Unit Trust has a super low OCF of 0.08%.

However investors are then also charged an additional 0.20% Stamp Duty Reserve Tax when they buy into the fund. That additional fee is going to give the investor’s first year investment returns a bit of a kick in the bollocks.

Investors in the Vanguard FTSE U.K. Equity Income Index Fund, get stung for double that amount at 0.40%.

Each of the following Fixed Income Vanguard funds listed below impose a dilution levy on any new investment funds being invested, ranging from 0.20% to 0.50%.

  • Vanguard U.K. Investment Grade Bond Index
  • Vanguard Global Bond Index
  • Vanguard U.K. Short-Term Investment Grade Bond Index Fund
  • Euro Investment Grade Bond Index Fund
  • US Investment Grade Credit Index Fund
  • Global Short Term Bond Index Fund
It is worth noting that even with the additional charges detailed here the Vanguard fund I have picked on remains more cost effective than the Blackrock (0.06% OCF + 5.00% initial charge = 5.06%) and Fidelity (0.06% OCF + 0.35% fees = 0.41%) equivalents.

View Vanguard’s full list of charges here.

So what?

The purpose of this post isn’t to give Vanguard a bashing, they do a fine job and offer many attractive investment vehicles to investors. The responsibility falls on the prospective investor to always do their due diligence and ensure they understand what it is they are signing up for when they pursue a given investment opportunity.

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