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Vanguard is one of the largest asset managers in the world, the architect of the index fund movement and the second-largest issuer of exchange traded funds – accolades accrued in large part to the company’s focus on minimizing the fees paid by investors.
The firm’s ETFs and index funds are either the cheapest or close to it in their respective categories and so frequent of a fee-cutter has been Vanguard that advisors and investors can hardly be blamed if they thought there wasn’t much room of the money manager to make their funds cheaper. To that , Vanguard just said “Watch this.”
On Monday, the asset manager announced expense ratio cuts on 87 of its funds pertaining to 186 share classes including ETFs, marking the largest such effort in the company’s nearly five decades of existence. Quantifying the fee reductions in dollar terms, Vanguard said clients will save $350 million just this year. Obviously, that’s important, but it’s not the only reason why the Vanguard fee parings are noteworthy.
Good Timing for Vanguard Fee Cuts
It’s always a good time for fund issuers to lower fees, but Vanguard’s latest move to do so is particularly well-timed because it arrives against the backdrop of increased adoption of actively managed ETFs, particularly those focusing on bonds.
Indeed, dozens of the Vanguard funds, both active and passive, subject to the newly pared expense ratios are fixed income products.
“Vanguard investors have access to world-class active fixed income management—91% of Vanguard’s active bond funds and ETFs outperformed their peer group average over the past decade,” said the issuer in a statement. “Vanguard’s actively managed fixed income funds and ETFs have a weighted-average expense ratio of 0.10% versus the industry average of 0.53% for active funds and ETFs from other firms. Vanguard’s bond index funds have a weighted-average expense ratio of 0.05%, less than half the average of 0.11% from our competitors.”
Importantly, the scope of the fee cuts on Vanguard bond funds is broad as it reaches corporates, municipal bonds and Treasurys across a variety of maturities. Some international bond funds, both developed and emerging markets, are also part of the wave of fee cuts by Vanguard.
Vanguard Fee Cuts Are a Big Deal
For years, the ETFs and index funds with the lowest costs have often ranked among the best when it comes to adding assets. That’s a big reason why Vanguard is a force to be reckoned with in the ETF space despite not being a prolific issuer of new products and having a lineup that’s smaller than some of its most direct competitors.
Point is, and advisors know as much, is that the lower a fund’s fee is, the more capital clients and investors retain over the long-term. That’s meaningful regarding performance.
“That track record of lower costs is directly correlated to the long-term performance of the firm’s mutual funds and ETFs–84% of Vanguard funds have outperformed their peer group averages over the past decade,” concludes Vanguard. “This latest expense ratio reduction will allow clients to retain an even greater share of their long-term returns.”
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