Key Points:
- The primary distinction is their treatment of dividends: VUSA distributes dividends to investors, while VUAG reinvests them automatically.
- They offer passive, low-cost exposure to the US market.
- The ongoing charge is a competitive 0.07% per year.
- Both VUSA and VUAG hold the same stocks, with top holdings dominated by major technology companies.
- VUSA has a variable dividend yield of around 1.40%.
Vanguard’s S&P 500 ETFs are the behemoth ETF index trackers for UK investors wanting pure US stock market exposure.
Warren Buffett believes almost everyone should concentrate their investments in just two funds: a US bond ETF and an S&P 500 ETF – preferably Vanguard’s. You could do worse than put all your eggs in a US basket, but for most UK investors, investing in a US stock ETF is an easy way of gaining exposure to the biggest economy as part of a more diversified portfolio.
Vanguard’s offering is one of the most widely recognized and cost-effective options available. But you might be wondering why there are two versions of the same ETF: VUSA and VUAG. In this post, we’ll explain the difference between the two, and provide an in-depth review of the Vanguard S&P 500 UCITS ETF.
(If you’re not sure what an ETF is or why you should consider investing in them, start here with What is an ETF?, and check out our How to Invest in ETFs: A Simple 6-Step Guide. Once you’re up to speed, pop back here armed with your new-found wisdom.)
VUSA vs VUAG Performance
Since VUSA and VUAG hold the same stocks in the same proportions, their performance is identical. The only difference lies in how dividends are treated. By reinvesting dividends, a VUAG investment may grow more quickly over time compared to VUSA, which distributes dividends to investors. However, the choice between the two will ultimately depend on your personal investment goals, tax situation, and life stage.
If you are looking at the performance history of VUAG you may notice that it only goes back to 2019. The accumulating version of the ETF is relatively new, but since the performance matches that of VUSA, you can use that as a guide to historical returns even if you have no desire for the distributing version.
For an even longer historical record, below is the S&P 500 since since 1988. VUSA and VUAG are designed to track the index, and do a sterling job of it, so a history of the index itself is effectively a hypothetical history of how the funds would have performed over the last 70 years. Note that this is the total return, meaning it includes the dividends that are paid out. The total return is what you can expect from an index ETF since you either receive the dividends as cash or they are reinvested on your behalf.
Accumulating vs Distributing ETFs
First, let’s clarify the difference between accumulating and distributing ETFs, as this is the key distinction between VUSA and VUAG. When you invest in an ETF, you essentially own a small portion of each company included in the fund. These companies may pay dividends to their shareholders, which can either be distributed as cash (in the case of distributing ETFs) or reinvested to buy more shares in the fund (in the case of accumulating ETFs).
VUSA is a distributing ETF, which means it pays out dividends to investors. VUAG, on the other hand, is an accumulating ETF that reinvests dividends for you automatically, thereby growing your investment.
VUSA vs VOO
VOO is the US version of the Vanguard S&P 500 ETF. It is listed on the New York Stock Exchange and is denominated in US Dollars. They are otherwise identical, holding the same stocks in the same ratios. If you’re UK-based then your platform will only offer VUSA.
Accumulating ETFs and UK Tax
A common question among UK investors is whether accumulating ETFs, like VUAG, are exempt from dividend tax. Unfortunately, the answer is no. While you don’t receive the dividends as cash, they are still considered income in the form of additional shares in the ETF. Therefore, you will need to account for dividend tax on these reinvested dividends when calculating your tax liability.
However, if you hold your investment within an ISA or SIPP, you won’t need to pay tax on dividends or capital gains. For a deeper dive into the exciting world of tax, see our guide to ETF tax for UK investors.
Why should you invest in an S&P 500 ETF?
Investing in S&P 500 ETFs like VUSA and VUAG provides you with exposure to 500 of the largest publicly traded US companies, making it an attractive option for those looking to invest in the US market. Vanguard’s S&P 500 UCITS ETF is a passive, low-cost fund that aims to replicate the performance of the S&P 500 Index.
There are many global ETFs that are labelled ex-US – they cover the world’s largest stock markets except the US. They are primarily popular with US investors who already have exposure to their home country and want to avoid doubling up on US shares.
For others, the flexibility of adjusting exposure to the world’s largest economy is important. Global equity ETFs are made up of about 60% US stocks. If that is too much (or too little) for your liking, one option is to hold an ex-US equity fund alongside an S&P 500 ETF, thereby allowing you to adjust the ratio as you see fit.
VUSA/VUAG Alternatives
The biggest competitor to Vanguard’s S&P 500 UCITS ETF comes in the form of the iShares Core S&P 500 UCITS ETF (CSP1). Both these ETFs track the S&P 500 index very closely, and any differences in product are relatively minor. It may come down to which is offered by your platform. If you invest directly through Vanguard then you are limited to VUSA/VUAG, and pay more than most other platforms over the long term, however most other major platforms will offer both.
If you are just starting out, you may want to look at Wombat Invest. They offer a curated selection of ETFs including the iShares Core S&P 500 UCITS ETF, and for smaller accounts are one of the cheapest places to invest in ETFs. They are currently offering a £10 Welcome Bonus to get you started, with no minimum deposit.
Vanguard Fees and charges
Vanguard ETF fee
The ongoing charge for Vanguard’s S&P 500 ETFs is just 0.07% per year. This is the fee you pay Vanguard for managing the fund and covering operating expenses. As far as management fees go, this is amongst the lowest you’ll find.
When you compare that 0.07% to an active fund that charges many times that and attempts (and mostly fails) to beat the index, and you realise that passive funds like this offer tremendous value. You won’t beat the market, but you won’t underperform it either. Given that almost all active funds fail to beat the market over the medium to long term, why pay extra for underperformance?
Vanguard Platform Fee
Despite its reputation for being a low-cost platform, Vanguard is one of the most expensive places to park your investments over the long term. This is because the headline annual charge of 0.15% is only capped at £375 per year once your account reaches £250,000. By way of comparison, Hargreaves Lansdown cap their much higher headline rate of 0.45% at £45 per year for ETF and share investments.
In practice this means that Vanguard is cheap for very small accounts, but the uncapped fees balloon surprisingly quickly.
VUSA/VUAG Holdings
Both VUSA and VUAG hold the same stocks, representing a diverse array of sectors and industries. The S&P 500 Index is market-cap weighted, meaning that larger companies have a greater influence on the index’s overall performance. As a result, companies like Apple, Microsoft, and Amazon make up a significant portion of the ETF’s holdings.
As you can see below, the top holdings are dominated by the big names in the technology sector. As markets change and companies come and go, the holdings of the ETFs will change in line with those of the index.
VUSA Dividend Yield
VUSA, as a distributing ETF, has a dividend yield that reflects the dividends paid by the companies within the fund. At the time of writing, VUSA’s dividend yield is around 1.40%. This means that for every £1000 invested, you can expect to receive £14 per year in dividends. Keep in mind that this yield can fluctuate over time, depending on the performance of the underlying companies and their dividend policies.
VUAG Dividend Reinvestment
As an accumulating ETF, VUAG reinvests the dividends received from its holdings back into the fund. This means you won’t receive any cash dividends in your investment account, but your investment value will grow as the reinvested dividends are used to buy more shares in the fund. This can lead to compounded growth and potentially higher returns over time.
How to Invest in Vanguard S&P 500 ETFs
Perhaps surprisingly, Vanguard’s own platform is not the best place to invest in Vanguard ETFs. In fact, despite its low-cost reputation, it’s one of the more expensive platforms over the long term. This is because despite having a lower annual charge, competitors like Hargreaves Lansdown and AJ Bell cap the fee at a much lower level.
Conclusion
VUSA and VUAG are excellent options for investors seeking exposure to the US stock market through the S&P 500 Index. Both ETFs offer a cost-effective and diversified investment approach, with the primary difference being the treatment of dividends.
VUSA and VUAG differ only in their treatment of dividends. VUSA is distributing: the dividends are paid into your investment account. VUAG is accumulating: Vanguard reinvests the dividends on your behalf. Your choice between the two will ultimately depend on your goals, tax situation and life stage.
