Vanguard recently crossed the $4 trillion mark in assets under management, buoyed by strong financial markets and record cash inflows.
First, thank you for your commitment to our way of investing and your trust in us. Vanguard CEO Bill McNabb put this staggering number—and responsibility—in perspective in a message to Vanguard crew: “I think of it as 4 trillion votes of confidence in the way we do things, and 4 trillion reminders that we must always put our clients first.”
Second, competitors are taking notice that investors are now much more cost-savvy and beating a path to Vanguard’s door. Some have taken to running ads and commercials touting low costs and comparing their funds to Vanguard’s. But there is more than meets the eye.
Let the buyer beware, as these promotions deserve a closer look. I am channeling my inner Jack Bogle here. In his 1993 best-selling book, Bogle on Mutual Funds, Vanguard’s founder used cleverly titled caveat emptor sidebars to alert readers to questionable industry practices, dubious products, and potential investing pitfalls.
My first caution is to examine the purported price advantage. Some ads are trumpeting a cost advantage of one basis point (0.01%) or even less—a half basis point (0.005%)!
Clifford Asness, founder of the global investment management firm AQR and a respected market commentator, recently (and wryly) tweeted: Moving from a 150 bps fee to 25 bps, huge. Moving from 25 bps to 10 bps, ok but not huge. The move from 5.0 to 4.5, deeply irrelevant.
To put it in dollar terms, the difference of a half basis point on a $10,000 investment is 50 cents; 1 basis point equals $1. Even at higher investment amounts and compounded over 30 years, the result is not all that meaningful.
Is Vanguard saying that costs don’t matter or we don’t intend to continue to lower expenses? No and no! But we agree with Asness on the diminishing value of de minimis differences in expense ratios.
Basis-point wise, pound foolish
My second yellow flag is that these ads don’t always compare like funds with Vanguard’s ultra-low-cost Admiral™ Shares and ETF Shares. Do your homework when assessing expenses, and look at other factors. There can be real differences in target benchmarks, as well as pre- and post-tax performance, which far exceed a basis point or two.
Consider, too, that some funds are achieving their cost advantage through fee waivers and expense caps. That’s a practice from the 1980s, employed mostly on money market funds, so fund sponsors could lure investors by advertising higher yields. Thankfully, such waivers are now disclosed in fund prospectuses and websites, so check the fine print.
Vanguard doesn’t resort to such practices. Vanguard’s low costs are long-term and durable, not short-term and promotional. Further, unlike the Johnny-come-latelies, Vanguard has been lowering costs—regularly—for more than four decades. In fact, we’ve reduced fund expense ratios 1,833 times over the last 40 years.
My final word of advice is to shop in the store that offers low costs across its offerings. While some firms offer alluringly low expenses on select products, Vanguard does so across asset classes (stock, bond, balanced, and money market funds); across product types (traditional funds and ETFs); and across investment strategies (active and index).
For example, say you want to complement your index holdings with an actively managed large-cap growth fund. The expense ratio of Vanguard U.S. Growth Fund Investor Shares is 0.46% (0.32% for Admiral Shares), compared with 0.82%,1 0.99%,2 and 1.14%3 for competitor funds.
Ben Johnson of Morningstar puts a sharper point on it in a recent article: “In many settings, these low-cost building blocks are simply loss leaders, a cheap gallon of milk meant to entice consumers into the storefront in hopes they’ll grab some Cheetos and a pack of gum before they get to the counter.”
Mission and model
Let me return to Bill McNabb’s statement: “We must always put our clients first.” Vanguard abides by this mission and model.
By mission—to give you the best chance of investment success. Lowering your investing costs is one way to do so.
And by model—there are no outside owners and therefore no conflicting loyalties at Vanguard. The company is owned by its funds, which in turn are owned by their fund shareholders. Our unique client-owned business model enables us to return profits to our fund shareholders in the form of lower expenses or to reinvest in the company to better the service and experience we deliver to you. As such, we are not beholden to a third party—corporate shareholders, company principals, or family members—to make a profit.
Prices can be matched, and even undercut by a basis point or two, but not our mission and not our model.
1 Source: Fidelity Blue Chip Growth Fund.
2 Source: Schwab Large-Cap Growth Fund.
3 Source: BlackRock Large Cap Growth Fund Service Shares.
- All investing is subject to risk, including the possible loss of the money you invest.
- Vanguard is client-owned. As a client-owner, you own the funds that own Vanguard.