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Last week, Vanguard did Vanguard things, announcing expense ratio reductions on 87 of its funds, including exchange traded funds, spanning 186 share classes.
It was the largest fee cut in the company’s 50-year history and likely the largest such move in fund industry history. It’s also a move that has clear implications for the fund industry at large because when it comes to fees, particularly against the backdrop of seemingly undaunted growth by passive funds, issuers can take one of three approaches.
A select few, including Vanguard, can consistently lower fund expenses incurred by investors because they’re just that good at accumulating assets. Other issuers don’t have that luxury because they’re operating expenses may be higher, their products haven’t gotten to the stage where fee cuts are feasible or both.
The third group is comprised of issuers that could lower fees but haven’t done so as of yet or haven’t done so in the broad fashion that Vanguard often does. Regardless of which of those three camps a fund company is in, Vanguards latest fee slashing cannot be ignored and it won’t be.
Vanguard Boxing Rivals Into a Corner
As advisors know, Vanguard possesses an advantage/luxury not held by some of its most direct competitors: it’s not a publicly traded company.
Focusing on the ETF side of the business, Vanguard is the only one of the six largest U.S. issuers that’s a privately held firm. Fine, toss out JP Morgan because that company makes far more money from commercial, consumer and investment banking than it does ETFs, but the point is Vanguard’s other closest ETF competitors have responsibility to shareholders. Vanguard doesn’t.
Broadly speaking, publicly traded asset managers, particularly those that don’t have the banking exposure of a J.P. Morgan Chase or a Goldman Sachs, face challenges in balancing appeasement of analysts and shareholders and efforts to keep fund fees palatable to advisors and investors. Said another way, fee compression is real and Vanguard just exerted more of that pressure on its rivals.
“Fee compression is a lingering issue for the nine traditional asset managers we cover,” observes Greggory Warren of Morningstar. “While the group had not seen management fees decline as dramatically as much as the rest of the industry the past decade, average asset-weighted expense ratios for the industry have started to fall at a slower rate than they had been, while fees continue to come down for our coverage at around the same pace we’ve seen for the past several years.”
Some Relief for Vanguard Competitors
The fee cuts announced last week by Vanguard run from one to six basis points across the 87 affected funds, but average out to just a single basis point. That’s not much, but as dedicated Vanguard investors know, the firm often lowers a fund’s or ETF’s fee by one basis point at a time, but does so multiple times over the years so those savings add up for long-term investors.
However, it’s not all bad news for Vanguard competitors. The resurgence of active management by way of the ETF wrapper has allowed for both fee reductions and keeping expense ratios at a point where some issuers can turn profits.
“Having been historically priced below average industry rates for active funds, there had been less pressure on firms in our coverage to lower their fees,” adds Warren. “But that looks to have shifted some during the past year, as we are seeing higher rates of decline in the realization rates of some managers in our coverage than for the industry overall.”