Thursday, 12 March 2015

Vanguard UK Equity Income Tracker - New Purchase

For some time now, I have held Vanguards All World High Yield income ETF in my ISA portfolio. The current yield is around 3.7% and I was pleasantly surprised at the end of last year when I compared its return against my basket of investment trusts.

Unfortunately there is no UK equivalent ETF, so I have been keeping tabs on their open-ended income fund which has been around for several years. I tend not to consider OEICs mainly for historical reasons and also because my broker charges me an extra 0.20% for holding them in my portfolio.

The Vanguard fund tracks the FTSE UK Equity Income Index, which I understand was specially commissioned by Vanguard from the FTSE index compilers.

The idea is simple - give investors access to a broad range of dividend-paying securities from across the FTSE 350, while reducing the risk of being overly invested in a small number of high-paying shares or particular industry sectors by limiting the percentage of the index invested in any one company or industry.

Index Construction

Here's a summary outlining how the FTSE UK Equity Income Index is constructed:

  • All stocks not forecast to pay dividends over the next 12 months are screened out.
  • All investment trusts and REITs are removed.
  • The remaining shares are ranked from highest to lowest by forecast annual dividend yield.
  • Stocks enter the index in order of their forecast annual dividend yield, until the total shares held in the index equals 50% of the float-adjusted market capitalisation of the available shares.
  • The number of shares in any one business is restricted to a maximum of 5% of the total value of the index.
  • The maximum amount invested in any industry sector is restricted to a maximum of 25% of the total value of the index.
  • The index is re-balanced twice-yearly. A stock remains in the index until its forecast annual dividend yield is no longer in the top 55% of qualifying shares; a stock that is not already in the index will qualify for inclusion if it falls within the top 45% of qualifying shares -- a 'buffer zone' that exists to minimise costs.

The Vanguard fund holds around 140 companies - the top ten holdings include all the usual suspects - Vodafone, Glaxo, Unilever, BATS etc. Other top 50 holdings include Next, L&G, Sage and BHP Billiton.

Ongoing charges are 0.22% and also a one-off initial stamp duty levy of 0.40%. In addition, my broker AJ Bell makes a charge of 0.20% for holding funds (no such charges for holding shares, investment trusts or ETFs). The total ongoing charges therefore are not excessive and certainly compare with say City of London IT - no broker charges but investment trust charges of 0.45%.

The current yield is around 4.0% based on projections from last years distribution. Dividends are paid out half yearly in June and December.

Of course, this is a departure for me. With my investment trusts which smooth out the dividend income by way of dividend reserves, I have a pretty good idea what income I can expect for the coming year. With funds, all the income has to be paid out so the distributions from one year to the next will be less predictable.

I will use the Vanguard UK income tracker as an additional benchmark against which to compare returns for my equity income portfolio - individual shares and investment trusts.


  1. Hi, I have some money in IShares FTSE Div Plus which has charges of 0.4%. How does this look to your experienced eye as compared with the Vanguard fund?

    1. Hi Cerridwen,

      The iShares ETF has been around for about 10 yrs. I believe it got off to a good start but investors got their fingers burnt during the market downturn of 2008/09.

      The problem was that the fund was holding just the highest yielders at the time e.g. banks and former building societies - as the share price fell the yield of these financials increased and they replaced index stalwarts such as BATS and Unilever etc.

      I think the methodology was tweaked after this crash but as far as I can see, it is still weighted purely on dividend yield - current top 5 holdings are Morrison (just announced 70% cut in divi), Berkeley, ICAP, Man Group and Amlin.

      To my reckoning, the Vanguard fund offers a far more robust and sustainable methodology compared to IUKD but of course others may have a differing opinion.

      Thanks for dropping by with your comment.

    2. Thanks. Some useful food for thought there - much appreciated :-)

  2. How about SPDR S&P UK Dividend Aristocrats ETF? Can be held in ISA or SIPP, been around for about 3 years. 0.3% TER. Give it a google.

    1. Yes, I seem to recall reading about this a couple of years back as it was touted as an alternative to the iShares ETF.

      It seems to be a slimmed down version of the US Aristo ETF however whereas the US fund selects from those with a 25 yr record of rising dividends, the UK version requires only 10 years.

      The index contains only 30 constituents which personally I would feel uncomfortable. However, whilst it is probably an improvement on the iShares Div+, it remains yield weighted. Also with a max holding of 30% to any one sector, it may be affected by the same problems experienced by IUKD during the last severe market downturn.

      For these reasons, I think the Vanguard remains the better option.

      Thanks for the suggestion and its always good to double check against other options.

  3. mmm if i was to pick one it would be the vanguard one as you have chosen and for your reasons too,
    not sure about these beta trackers ive read they could be good for a few years then turn negative , so kind of cyclical risk. just not sure. !!
    anyway im maxed out with vanilla trackers for the time being but ill observe with intrest.

    1. aurora,

      Thanks for the vote of confidence!

      I share your scepticism about so called 'smart' beta trackers - they are a fairly recent innovation but seem to be multiplying rapidly as fund managers create their own refined index to track - low volatility, quality, fundamental value etc.

      I suspect we need more time to evaluate whether they can improve returns consistently compared to the traditional trackers.

      The main thing for the average investor is to be sure to fully understand the nature of the index being tracked when considering a purchase - and of course to keep an eye on any extra charges.

      Thanks for stopping by with a comment.

  4. Fundamental trackers, now called smart beta funds, have a track record of over 7 years.

  5. so sorry to be abit negative . i must admit i would prefer to own the vanguard uk equity index tracker as you have rather than hold individual shares. so im hoping its works well as the alternative. i read alot about it so im very keen myself. theres no doubt if i make the move it would be the vanguard one. i shares had a bad time and i believe hasnt fully recovered and SPDR artistocrats has only 30 shares so theres a much better spread with the vanguard one which i feel is safer so i may be following suit.!

  6. I've been using this fund in my SIPP. I have 75% in Vanguard FTSE UK Equity Income Index Acc and 25% in Vanguard LifeStrategy 20% Acc. This gives my SIPP 80/20 equity/bonds with a small amount of global equity exposure but it's mostly UK focused. I'm happy with the way these two funds have been working together, but only time will tell, especially when things start to go south. My main concern is what happens if I want to convert to Inc funds when I retire...

    1. Thanks for leaving a comment.

      I'm not sure I would feel comfortable with 75% of my sipp allocated to UK equities. I would want a bit more exposure to other countries and I would be therefore looking at a couple of global trackers (see recent post on advice to 21 yr old self).

      It should not be a problem to switch over to the income version of your fund at the point your retire. I also hold the Vanguard All World High Income ETF and several investment trusts.

      Good luck with your investing journey.

  7. Is Vanguard UK Equity Income Fund a good alternative to City of London Investment Trust.

    1. Both cover a similar area so it will depend on whether you want a managed fund or passive. I have held CTY for many years and continue to hold both in my income portfolio. Please be aware however that I cannot give specific advice and this blog is merely a reflection of my investing journey.