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Why Vanguard Gets the Lion's Share

Mon, 29 Aug 2016

The fund firm has been dominating the market with a low-fee promise, and as it gains scale, it becomes even harder to compete with.

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Video Transcript

Timothy Strauts: In today's chart we are going to examine fund industry flows by comparing Vanguard to the rest of the industry. 

The chart shows the annual flows into mutual funds and ETFs since 2000. The red bars are Vanguard flows, and the blue bars are the rest of the fund industry. In 2000, Vanguard was the second largest fund family and controlled 11% of industry assets. Since then, index investing has taken off, and Vanguard has been the largest beneficiary of this trend. This is due to their unique ownership structure in which the firm is owned by the shareholders in the funds. So there is no mandate to generate profits at the firm. Instead all profits are returned to shareholders in the form of lower expenses. This allows Vanguard to have some of the lowest fees in the industry. 

Investors have clearly taken notice as flows to Vanguard have been increasing for the last 15 years. Remarkably, since 2015, Vanguard has continued to get record flows while the rest of the industry has been losing assets. Today, Vanguard is the largest fund company by far and controls 22% of industry assets. If Vanguard gave away its average flow for one day which is about $740 million, every person in the U.S. would receive $2.32.

Normally, a large number of assets at one fund company would be cause for concern, because performance of funds usually suffers when assets get too high. However, this isn't the case for Vanguard, because 74% of their assets are in index products. For most index funds it actually gets easier to manage the fund as assets grow. As Vanguard gets larger it gains more economies of scale which allow them to continue reducing fees, which makes them very difficult to compete with.

In conclusion, Vanguard has been good for investors because they offer good funds at low prices and have forced the rest of the industry to lower fees as well.

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