Best Vanguard Funds UK: A Comprehensive Guide to Maximizing Returns with Low Risk

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Investing in Vanguard funds has become increasingly popular in the UK, with the platform disrupting the market and forcing competitors to lower fees. But with so many options available, which Vanguard funds are the best? In this article, we will dive into the details and analyze the top Vanguard funds in the UK, considering factors like returns, risk, and fees.

When it comes to investing, it’s not just about high returns. We also need to consider the level of risk and fees involved. Ideally, investors would want a higher return with low risk and low-cost funds. To determine the best Vanguard funds, we need to analyze their historical returns, as well as factors like volatility and total cost of ownership.

Let’s take a closer look at the returns of Vanguard funds over the last decade. Unsurprisingly, US funds have been the best performers, generating an average annual return of 15%. Funds that contain a significant amount of US stocks, such as the Developed World X UK fund, have also performed well. Global small-cap funds have outperformed in the long term, while returns from the UK all-share and emerging markets have been relatively disappointing.

However, it’s worth noting that fixed income funds tend to have lower returns because bonds are primarily purchased for safety rather than high returns. As for risk, volatility is a key measure to consider. Ideally, investors would seek funds with low risk and high returns. Unfortunately, there are no funds that meet this criteria. On a risk-return plot, we can see that fixed income funds have the lowest volatility but also the lowest returns, while a group of high-risk, low-return funds also exists.

Now let’s explore the popular Life Strategy funds, which offer a diversified portfolio with different levels of risk. The Life Strategy funds contain a mix of global equity and bonds, and their risk level increases from Life Strategy 20 to Life Strategy 100. Unsurprisingly, Life Strategy 100, which has the highest allocation to stocks, has generated the best historic returns over the last 12 years.

However, there is a significant drawback to the Life Strategy funds. They have a heavy overweight in UK stocks, which makes up 6.5 times more than expected based on the size of the UK market. Considering the relatively poor performance of the UK market, this is not an ideal allocation. It’s worth noting that it’s possible to replicate the returns of Life Strategy funds using other Vanguard funds at a lower cost. Rebalancing would need to be done manually, but it allows for a more balanced allocation, reducing the UK overweight.

Looking ahead, future returns are uncertain, but Vanguard provides a 10-year outlook on various asset classes. While the UK is expected to have modest returns, Vanguard predicts higher returns for global ex-UK equity and emerging market equity. Fixed income funds, particularly emerging market sovereign bonds and UK corporate bond funds, are also expected to generate attractive returns. Cash is expected to generate an average return of 4.2%.

One advantage of Vanguard funds is their low management fees. The passive funds offered by Vanguard have some of the lowest expense ratios in the market, ranging from under 0.3% per year. These fees are significantly lower than many other UK funds. However, it’s worth noting that funds investing in illiquid assets, such as small-cap stocks and emerging market bonds, tend to have higher fees due to trading costs.

While Vanguard offers both passive and active funds, the active funds have much higher fees. On their platform, all active funds except the money market fund have fees above 0.2%, which is considered expensive. As a result, it may be wise to avoid these expensive active funds and focus on the low-cost passive options.

In conclusion, when choosing the best Vanguard funds in the UK, investors should consider a range of factors, including returns, risk, and fees. Vanguard offers a variety of funds with different levels of risk and cost. It’s important for investors to carefully analyze these factors and customize their portfolio based on their individual risk tolerance and financial goals.