Difference between Vanguard and Blackrock tracker

cashbackproblems

Hi all

I currently have trackers i hold with HL and i am looking to move them to Vanguard tracking the same area. For some however i have noticed the tracker tracks a different index and there is a difference in performance, for example blackrock is msci and vanguard is ftse em index. Is there a better index to choose?

HL

Blackrock Asia pacific
Blackrock emerging markets
Legal and General us index
Blackrock continental european tracker

And looking to move to equivilent vanguard trackers

Thanks

cashbackproblems

Eg

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/b/blackrock-emerging-markets-equity-tracker-h-accumulation

To

https://www.vanguard.co.uk/uk/portal/detail/mf/overview?portId=9140&assetCode=EQUITY##overview

One is msci the other ftse all world emerging index

bowlhead99

An obvious difference between FTSE emerging and MSCI emerging is one of the index groups treats Korea as emerging and one considers it developed Asia. So, be consistent in what you are using for emerging and developed Asia otherwise you will be doubling up on, or missing out entirely, companies like Samsung, LG, Hyundai etc. Of course, they will still only be a small part of your portfolio if you include them but mixing methodologies to miss something or double up on something would be irrational unless one combination of trackers is substantially cheaper than another.

The L&G US index is 600 companies from the FTSE USA index. Whereas Vanguard's US index fund follows S&P Total Market, a US index with 3500 stocks. Vanguard via Vanguard rather than L&G via HL will be a substantial fee saving as well as it being a 'better' index to try to follow. However, Vanguard indulge in 'stock lending' while L&G do not, so you might expect some tracking error and slightly enhanced counterparty risks vs the underlying index. But as it is a better index you might be happy with that.

The Blackrock Continental Europe tracker is based on FTSE World Europe Ex-UK, while the Vanguard rough equivalent uses FTSE Developed Europe ex-UK. The difference is that Vanguard's is specifically only 'developed' Europe so will be missing countries like Poland, Turkey, Hungary, Greece, Czech etc. These are relatively small countries by market cap so the 'market missed' by moving to vanguard is only a couple of hundred billion of company value so about 3% of the total value being tracked. But the inclusion or exclusion of emerging markets can be important because their returns will differ from developed markets.

For example in the last 5 years, developed did relatively better so the five year total return was over 1.5% better overall by following the 'developed' rather than 'world' version of FTSE's Europe ex-uk index. It could be the opposite way round next time. However, the platform fee savings from Vanguard vs HL is 1.5% over five years anyway. And you are already planning on using a dedicated emerging markets fund which will cover things like Poland and Turkey.

You are already presumably confident in selecting what indexes you want to follow and in what proportions to deliver your desired returns and risk exposure, as you are using individual indexes rather than some multi-asset or multi-index fund. So, deciding which fund to use is part of that process.

The choice is not just vanguard on a cheap vanguard platform vs free range on an expensive HL platform. You could also consider your vanguard on a vanguard platform, vs free range on a cheaper-than-HL platform. Example, charles stanley direct's platform fee is only 0.1% more than vanguard's platform fee, and some non-percentage-based platforms could be cheaper still. The range of returns between two different indices covering roughly the same region or asset class will easily be in excess of 0.1% a year anyway (before you even get to differential in management fees and operating costs). So, don't fixate on platform cost only although I agree HL is a good place to be moving away from.

At the end of the day however, even if one performs better by 0.2% one year it might be worse, by more, the next year. So if you would not be considering doing much research other than tossing a coin and picking one, I don't suppose 'fine tuning' the potential results is going to be something you are too concerned about.

bigadaj

Good summary bowlhead.

Didn't realise that vanguard indulged in stock lending and a bit disppointed with it really given their espoused simple and straightforward approach to investing.

bowlhead99

It is one of the reasons they offer such good returns, with the proceeds of such activities allowing the fund performance to track in line with the indexes (or even above them in a good year) despite charging fees - because the income is able to cover some of the fees.

Stands to reason really when they have billions or millions of equities in all the major index constituents and other creditworthy institutions want to borrow them and are willing to pay a fair price for it.

Another reason their reported fund performance looks good against the raw index, relative to competitors, is their practice of not being too shy to charge a dilution levy or initial charge on funds which have high trading costs (such as UK equities with 0.5% stamp duties on purchases made by the fund).

It's quite logical; some fund managers will not have an initial charge but then all the costs of deploying new subscriptions into growing the fund's pool of assets will be suffered as general expenses by the fund's investors as a group, acting as a drag on reported bid-to-bid returns. Whereas Vanguard's returns from a NAV perspective are relatively unscathed because they have the extra initial charge on their FTSE 100 tracker which sits outside the 'reported returns' chart.

So, when reviewing funds for performance and tracking error etc it is worth thinking everything through and comparing apples to apples.