Should I be looking for the lowest index fund fees?

Back in the day, the lowest index fund fees were the last thing on anybody’s mind. Nowadays they have become an absolute obsession. So much so that my inbox is like a broken record.

I blame Invesco because they’ve come along and put the cat among the pigeons. Let me explain:

You see, up until last year there was only really one ultimate expat ETF:

Vanguard FTSE All-World UCITs ETF

We’ve gone into a lot more detail about why here, but suffice to say it’s cheap, tax efficient for UK expat investors and provides exposure to global business in a single investment fund.

Sure there are a lot of alternatives out there, but they don’t tick all the boxes. Or at least they didn’t use to. Enter stage left a little something from Invesco:

Invesco FTSE All-Word UCITs ETF

The clue is in the name in that the only difference between the one from Vanguard and the one from Invesco are their company names.

In other words, on the face of it, these two funds are essentially the same thing, but with one major difference:

One of them has the lowest index fund fees, whereas the other one doesn’t.

Now everybody knows fees matter in investing.

In fact, they are the one thing you can control so have we found a new ultimate expat ETF?

Your fund’s annual fee

There are a lot of fees in investing but in nearly every case the most important one is your fund’s annual fee.

If you are new to all this, it can be a bit tricky because there are a few different ways to describe this.

Up until very recently we used to look at either Ongoing Charges Figures (OCF) or Total Expense Ratios (TER), but nowadays people have started talking about a fund’s Total Cost of Ownership (TCO).

So which is the one we should be looking at?

Well, for comparison purposes you probably won’t go far wrong with any of them. However, I think most would agree that TCO is a superior number.

The TCO

You see, the TCO takes account of the OCF (or TER) but also adds in transaction costs ie the costs of buying and selling shares within the fund itself.

You are getting more information with this number.

So then the question becomes how do these compare between our two All World ETFs.

When we look at the TCOs for these two, it’s 0.15% vs 0.24% in favour of Invesco:

Now that looks like a sizeable difference. Particularly at a time when people are being brainwashed into thinking the lowest index fund fees are all that matters in investing.

In fact, this TCO cost difference is big enough for many an expat investor to be thinking about swapping from one to the other.

How do I know? Because they keep asking me about it.

My original expat ETF recommendation is starting to look a bit sketchy.

Should I move my money from Vanguard to Invesco?

So should you swap from the Vanguard FTSE All World to the new Invesco equivalent?

Whilst I have to agree fees are important to investing, here’s the thing.

I think we have to put things in perspective here.

Sure 0.15% is definitely lower than 0.24%, but does that really mean 0.24% is high?

I don’t think so. In fact, I’d go so far as to say that it isn’t high at all.

I mean, come on the difference is just 0.09%.

I know we are told tiny differences matter in investing, but 0.09%… really?

Let’s put some numbers on it to find out.

Vanguard vs Invesco fees

On £10K you’ll get charged £24 per year with Vanguard vs £15 with Invesco. That’s a difference of £9 a year.

I can’t imagine what kind of expat investor would begrudge paying £9 a year. I mean, that’s 75p a month, 17p a week…….. 2p a day!

Sure, over the very long term, that slight difference could add up to something a little more significant, but really, for most people, most of the time it ain’t going to be an investment deal breaker.

Dare I say that it’s insignificant enough to ignore.

When fees don’t matter

Here’s a couple more examples to show you what I mean (assuming 7% annual returns):

If you invested £10K for 10 years you’d have £19,235 with Vanguard and £19,397 with Invesco.

And if you invested £100K for 20 years you’d have £369,974 with Vanguard and £376, 262 with Invesco.

Yes, it’s a difference. Yes the difference gets bigger the more you invest.

But again, for most people most of the time, it just isn’t going to make or break your investment returns.

And here’s an important thing that a lot of people miss. While going for the lowest index fund fees you can find makes a lot of sense all things being equal, it may not when all things aren’t equal.

Spoiler alert: They never are.

The ultimate expat ETF needs to tick a lot of boxes.

How to choose the right ETF

Whilst searching for the lowest index fund fees is commendable, this is only up to a point. Fee differences become a lot less significant when the difference is small.

In fact, when the differences are small there are a whole host of other fund characteristics that come into play.

We’ve already touched on the fact these two global ETFs are pretty comparable with the characteristics that should appeal to an expat investor, but that’s just scratching the surface.

There are many things that make one fund more desirable than another. Here’s a comparison of our two funds using a few of the bigger fund characteristics that matter.

Vanguard FTSE All-World UCITs ETF vs Invesco FTSE All-World UCITs ETF

Reputation of Fund Provider

Whilst there’s nothing inherently wrong with Invesco. They ain’t no Vanguard. Not in terms of reputation anyway. Dare I say I think Invesco are offering low cost funds because they have to.

If they didn’t, all the money would flood to Vanguard. They aren’t the only one. It doesn’t mean they are a bad company. They produce good products at reasonable prices but the fact of the matter is Vanguard changed the game when it comes to investing.

In the US Vanguard are essentially run as a not for profit. They are famous and loved for passing on cost savings to their investors.

So I don’t think I’m going too far out on a limb to say Vanguard have the best reputation in finance full stop, period etc and so on.

Vanguard 1 – Invesco 0

Track Record

As the Invesco FTSE All World ETF has only just arrived on the scene we don’t have too much to go on in terms of track record.

Invesco are a sizeable company so we’d expect them to be OK if not really good, but even then it’s unlikely that they will beat Vanguard’s FTSE All World for one simple reason.

The Vanguard option has a faultless track record.

The best Invesco can do is hope to match Vanguard but as we aren’t there yet……

Vanguard 2 – Invesco 0

Tracking differences

Tracking difference represents how closely an ETF can replicate its benchmark index, in this case the FTSE All-world.

Big fund providers can often do this better than the index that they are following and the Vanguard FTSE All World ETF is no exception in this regard.

It’s a fact that Vanguard has consistently tracked better than its benchmark.

Not only is this important because it illustrates Vanguard are doing a good job, there is another benefit too. It can translate in to cost savings in that you end up getting charged less than the TCO would suggest.

In other words, Vanguard’s annual charges may be less than their TCO.

Now, new funds, with assets under management or money invested find it harder than bigger funds to track accurately.

It’s not necessarily their fault. It’s just the nature of the way these things work. If Invesco All World get’s as big as the Vanguard version it may track just as well.

But again, we aren’t there yet.

Vanguard 3 – Invesco 0

Assets under management

You may be beginning to think Vanguard is winning this comparison simply by their fund being older and bigger.

And to be honest, there’s something to that.

Since Invesco has just introduced its fund, it is essentially tiny compared to Vanguard and that matters.

You see, you can only offer funds with low charges over a certain size. Whilst I have no proof, there’s a good chance Invesco are loosing money on their All-World ETF as things stand but because the fees are low they’ll expect to grow their assets under management up to a point where they are profitable.

And whilst that will probably play out, until it does, there’s always a risk that they never get big enough to make enough money.

And that’s a risk for investors because it means the fund could be closed.

Yes, you’ll usually get your money back but here’s the thing, depending on your tax status this could trigger a tax event and that could cost a lot more than any tiny difference in annual fees.

Vanguard 4 – Invesco 0

Bid-offer spread

The bid offer spread is the difference between the sale price and the buying price. With established funds like Vanguard’s All World ETF these are very low, but with newer and/or smaller funds they tend to be higher and this is critical because it adds money to the underlying charges you pay.

Right now Vanguard’s are much lower than Invesco’s and I’d expect that to continue for some time.

Whilst I don’t know for sure, you have to think this could increase the overall cost of the Invesco All World ETF or at least make it less profitable for them if they are taking the hit themselves. (Back to the fund getting closed worry).

Sorry Invesco but that’s a whitewash…

Vanguard 5 – Invesco 0

The bottom line

If you were looking for the lowest index fund fees and only this, then Invesco’s FSTE All World ETF would be a stand out winner for many an expat investor.

However, there are other things to consider with ETFs, and Vanguard trumps Invesco in every single one of them.

Not only that but some of the differences between the funds mean Vanguard’s ETF may end up being cheaper than the suggested fees whilst Invesco’s may end up being higher.

That may change as more investors put their money in Invesco’s ETF, but we are far away from that day at the moment.

And even if the day comes where Invesco does start competing in the other areas the fee difference isn’t really going to make or break your investment returns.

So a sensible expat investor probably doesn’t want to be moving their money from Vanguard to Invesco just yet.

Maybe one day in the future the Invesco FTSE All World ETF will be the ultimate expat ETF, maybe not.

One things for sure though, we ain’t there yet.