Vanguard FTSE 100 UCITS ETF (LSE:VUKE) - ETF price


ETF Report

Vanguard FTSE 100 UCITS ETF VUKE

AnalystReport

PortfolioConstruction

The FTSE 100 Index is a free-float-adjusted, market-cap-weighted index that offers exposure to the 100 largest UK stocks. It represents about 85% of the market capitalisation of the London Stock Exchange and 5%-6% of the world’s equity market capitalisation. The constituents of the index are determined quarterly. The index’s top sector exposures include financial services and energy (both 18%-23%), consumer defensive (15%-20%), and healthcare (10%-15%). Royal Dutch Shell, HSBC, and BP are the three largest constituents of the index, with a 5%-10% weighting each. The next largest stocks represented are British American Tobacco and AstraZeneca, with a 4%-6% weighting each.

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Fees

At 0.09%, this fund is one of the cheapest ETFs tracking the FTSE 100 Index. This ETF is considerably cheaper than the average UK large equity active offering and also amongst the cheapest index-tracking funds. On top of holding costs, ETF investors will typically be charged trading costs, including bid-offer spreads and brokerage commissions when buy and sell orders are placed for ETF shares.

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FundConstruction

The fund uses full replication to track the performance of the FTSE 100 Total Return Index. It invests in all the constituents of the index with the same weightings stipulated by the index. Dividends received from the stocks are reinvested in FTSE 100 Index futures until they are distributed to fundholders on a quarterly basis. This dividend treatment allows the fund to maintain full index exposure and mitigate cash drag, which in turns helps to minimise tracking error. Index funds should provide the returns of their benchmark less fees. This ETF has delivered just that: It has underperformed the benchmark by an amount roughly equal to its ongoing charge. The fund engages in securities lending. As a general rule, the amount of assets that can be lent out by a fund at any given time is capped at 15% of net asset value. The securities-lending programme accepts noncash collateral in the form of five sovereign debt securities, including US Treasuries, UK gilts, German bunds, French OATs, and Dutch sovereign debt securities. Vanguard requires 102% collateral for all loans, and 105% if the underlying currency of the security on loan is different from the underlying currency of the accepted collateral. To reduce operational risk, each security on loan is marked-to-market daily. The current securities-lending revenue split is 90/10, with 90% of gross revenue returned to the fund and 10% paid to JPMorgan, the lending agent, which also provides full indemnification on all securities-lending transactions.

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Suitability

As a strategy to invest in UK equities, the mega-cap-focused Vanguard FTSE 100 ETF won’t serve long-term investors well. It retains a Morningstar Analyst Rating of Neutral. 

The FTSE 100 Index is concentrated in giant-caps and leaves investors underexposed to the other size segments of the UK market. This reduces the odds to outperform better-diversified UK large-cap equity Morningstar Category peers.  

Active managers have demonstrated they can add value over long stretches of time by overweighting mid- and small caps when the market environment is favourable to the latter. On the passive side, we have a more favourable view of funds that track the broader FTSE All-Share Index.

This fund has lagged the average peer in its category since its 2012 inception. Other FTSE 100 Index trackers with longer records have underperformed around three fourths of the UK large-cap fund universe in the past 10 years on a risk-adjusted basis. Over this period, the FTSE 100 Index has suffered from unfavourable stock exposure to the financial services, consumer defensive, and consumer cyclical sectors.

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Fundamental View

The FTSE 100 Index is made-up of large- and mid-cap companies and excludes small- and micro-cap companies.

Market-cap weighting skews the portfolio towards the largest companies in the universe, such as Royal Dutch Shell, BP, and HSBC. Its average market cap nearly doubles that of the average category peer. There are no limits on sector weightings, but the fund has remained well-balanced over the past five years. Its top 10 holdings account for around 45%-50% of the total value.

The bias towards larger companies drives its category-relative long-term performance. As of this review, the fund has invested only 17% of its portfolio in mid-caps, compared with 23% in mid-caps and 9% in small caps for the average category peer. Active and passive funds with a broader scope have managed to deliver better risk-adjusted returns by tapping into the smaller companies on the UK market. 

While most of the companies in the FTSE 100 Index do business in the UK, the largest holdings have a global reach. As of this writing, most of the revenues derived from the United States and the UK--about one fourth each--followed by continental Europe (15%-20%) and China (12%-15%). The fund’s exposure to revenues from nondeveloped countries is about one fifth of its market value.

Most of the fund’s holdings enjoy durable competitive advantages. Of the holdings Morningstar equity analysts cover, over three fourths by market value carried a Morningstar Economic Moat Rating of either wide or narrow at the end of October 2018, which is comparable to the category average.

Investors looking for more-comprehensive exposure to UK equities can choose broader indexes such as the FTSE All-Share Index. Compared with the FTSE 100 Index, the All-Share Index provides a better representation to the UK market. Its weightings towards mid-, small-, and micro-cap companies are more in line with those of the average peer, which makes it tougher to beat.  

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Alternatives

There is no scarcity of alternatives for investors looking for passive exposure to UK large-cap equities. Providers including (but not limited to) iShares, Xtrackers, Lyxor, Source, Amundi, and HSBC offer a FTSE 100 or MSCI UK ETF at ongoing charges ranging from 0.07% to 0.33%. As of this writing, the cheapest options are iShares FTSE 100 (Dist), iShares core FTSE 100, and HSBC FTSE 100 ETF, each with fees of 0.07%.

Those looking for broader and more-diversified exposure to the UK equity market can consider ETFs that track the FTSE All-Share Index, which represents at least 98% of the UK market capitalisation and is the aggregation of the FTSE 100, FTSE 250, and FTSE Small Cap indexes. SPDR FTSE UK All-Share ETF levies the lowest ongoing charge at 0.20%. Fidelity, Vanguard, BlackRock, and L&G offer index funds that are even cheaper, with fees as low as 0.06%.

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AJ Bell Management Limited (company number 03948391), AJ Bell Securities Limited (company number 02723420) and AJ Bell Asset Management Limited (company number 09742568) are authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales at 4 Exchange Quay, Salford Quays, Manchester M5 3EE. See website for full details. AJ Bell procures the provision of the Morningstar Licensed Tools on an “as is” basis and does not guarantee the performance of or accept liability for the Licensed Tools. To the maximum extent permitted by law, AJ Bell excludes liability for the Licensed Tools, including liability for any failure, interruption, delay or defect in the performance of any Licensed Tool, unless it arises as a direct result of the negligence of AJ Bell.
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