Vanguard recently announced that over the past six months, they have reduced expense ratios for 200 fund and ETF shares amounting to aggregate savings of about $215 million.
That’s $215 million more in investors pockets (or, hopefully, accounts), when they probably didn’t even need to cut their fees because they were already the lowest in the market.
Who does that? (not the announcing, but the continual fee lowering part)
Vanguard’s fees were already the lowest in the industry at an average expense ratio of 0.18%, or less than one-fifth that of the 1.01% industry average. But they have reduced them further by a whopping 50% over the past five years, to an asset weighted average of 0.12%. 0.12%!
Yet, they just keep lowering them again and again. And as a result, all other financial institutions have been forced to lower their expense ratios as well in order to be at least somewhat competitive (most are not) with Vanguard.
Is this some kind of sick joke? Why would a ‘Murican company rob itself of guaranteed profit?
It all goes back to 2 key differences versus other financial institutions that I highlighted in my Vanguard review,
There are two things that set Vanguard apart from just about every other investment firm on the planet:
- Vanguard provides its services to the Vanguard funds at-cost. Their funds cost investors what they cost them to run.
- Vanguard is client-owned. As a client-owner, Vanguard investors own the funds that own Vanguard. The only “shareholder” Vanguard has are its customers. They are not a publicly traded institution, driven by financially incentivized shareholder greed.
There are many online brokers out there, and some present a very good case of why you should invest with them instead of Vanguard (i.e. lower trading fees on non-Vanguard ETF’s or stocks). However, I haven’t found a good reason as to why you would want to invest in mutual funds or ETF’s that don’t carry the Vanguard name. And I don’t see that changing anytime soon unless a competitor to Vanguard comes along with a similar philosophy, organizational structure, and costs.
There is a reason why Warren Buffett once shared the following advice in a shareholder letter, when explaining what he would tell his trustee to do with his estate,
Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s)
It’s the same reason why popular automated investing platforms like Betterment choose mostly Vanguard funds for their asset allocations (as they say, “built on Nobel Prize winning research”. Ooooh, fancy!). Vanguard is consistently the lowest cost and passive index investing has proven to produce the best returns over the long run. The active vs. passive investing debate is over, in my opinion. Some people say passive index investing is boring. I think passive investing is spectacular.
It’s worth noting that I don’t get paid to write about Vanguard – I just like them that much. And you should too.
Update: Fidelity has launched 2 zero-cost index funds and slashed fees in order to (at least temporarily) beat Vanguard. Will Vanguard raise it’s game?
I love Vanguard! All my funds are with Vanguard.
Well-said. I’d like to point out that many 401K providers provide funds from other providers. E.g. Wells Fargo includes a couple of PIMCO funds, Schwab includes a couple of Vanguard funds, etc. So even if your default fund is an expensive and active-managed one (which is often the case), you very well may be able to go in and choose a Vanguard fund or two and get far more bang for your 401K buck.
That’s true – and a great point. Seek out your Vanguard options!
I love Vanguard and have had my Roth IRA with them since I was in college. I have kept my former employer’s 401k with Fidelity, and this might be the reminder/push I needed to roll that over to Vanguard. My one complaint about them (and its probably part of how they keep their costs down) is that they stopped offering Educational Savings Accounts a few years back. I have a son we’re saving for and I’d rather have the money directly with Vanguard, but I guess I’ll leave my retirement with them and give E*Trade a shot for the ESA.
Have you considered a 529? I did a Coverdell vs. 529 breakdown: https://20somethingfinance.com/coverdell-education-savings-account/
Great news from Vanguard. I’m a big fan. I have my Roth IRA with them and my 401k has a bunch of Vanguard funds as options. Investing in a Vanguard stock fund for the long term is an incredible way to build wealth.
Great article, thanks for all your work and insight! So, I have used ETF’s for the S&P 500 and it charges about .09% expense ratio. How does that commpare to a S&P 500 Vanguard fund expense? thank you
The expense ratio for the SAME THING with Vanguard is HALF, .05%.
Bulk of my retirement is a Vanguard S&P 500 index fund (VIIIX) through T. Rowe Price with a .02% expense ratio. You just can’t beat that.
well… hypothetically, you could with 0.01% or 0.00% =)