Risk level for Vanguard funds Vs ETFs

safe_hands2

I've been investing in mutual funds for a few years and have just started looking at ETFs. There seems to be ETFs on vanguard that roughly match a fund equivalent, but I've noticed that the ETF is always a higher risk level by one number. For example VAGS global aggregate bond ETF compared to global bond index fund. The same seems to be true for FTSE 100, all world equities and more. Just interested in why this is 

InvesterJones

safe_hands2 said:

I've been investing in mutual funds for a few years and have just started looking at ETFs. There seems to be ETFs on vanguard that roughly match a fund equivalent, but I've noticed that the ETF is always a higher risk level by one number. For example VAGS global aggregate bond ETF compared to global bond index fund. The same seems to be true for FTSE 100, all world equities and more. Just interested in why this is 

It's quite hard to compare as I'm not really finding the same fund across OIEC/UT and ETF - I think FTSE100 is about the only one, but it does indeed have a one higher risk score for the ETF. Maybe it's because they can be traded like a stock?

Hoenir

ETF's are in effect shares. They can be traded at discount/premiums to NAV. 

masonic

ETFs are priced continuously during market hours. Volatility, a major factor in determining the risk grade, would be higher compared to a fund that is priced once per day. The peaks and troughs will be larger.

The Vanguard ETFs are also all offshore funds (domiciled in Ireland) with no FSCS protection available if the Irish investment company managing the portfolio goes under. Though it would be vanishingly unlikely for the parent company not to make good any deficits in this case.

Overall a few additional risk factors, so not entirely surprising they are up a risk level on OEICs.

GeoffTF

masonic said:

ETFs are priced continuously during market hours. Volatility, a major factor in determining the risk grade, would be higher compared to a fund that is priced once per day. The peaks and troughs will be larger.

The Vanguard ETFs are also all offshore funds (domiciled in Ireland) with no FSCS protection available if the Irish investment company managing the portfolio goes under. Though it would be vanishingly unlikely for the parent company not to make good any deficits in this case.

Overall a few additional risk factors, so not entirely surprising they are up a risk level on OEICs.

Volatility is the only factor that is considered. The procedure for calculating the Risk Class is specified in the "Annex to CESR’s technical advice on the level 2 measures related to the format and content of Key Information Document disclosures for UCITS (Ref. CESR/09-949): methodology for the calculation of the synthetic risk and reward indicator", which can be found here:

https://www.esma.europa.eu/sites/default/files/library/2015/11/09_1026_final_kid_srri_methodology_for_publication.pdf

The Synthetic Risk and Reward Indicator (SRRI) is based on the volatility of the funds over the past five years. The Risk Class depends on which interval the volatility falls within:

1:  0%-0.5%
2:  0.5%-2%
3:  2%-5%
4:  5%-10%
5:  10%-15%
6: 15%-25%