Dan Culloton: I'd like to go to the granddaddy of all index funds, and you've launched an ETF share class for that fund after many, many years of waiting. What is to keep someone from just going straight to the ETF instead of going to the Vanguard – the traditional share class of the Vanguard 500 anymore? Will the ETF share class make the traditional share class of the Vanguard 500 obsolete?
Gus Sauter: I don't think it will make it obsolete because we've had both the conventional share class and the ETF share class available in other funds for the last decade, and both share classes, both the ETF and the conventional share classes, have attracted assets. So, I think that the conventional share class of the 500 portfolio will continue to attract assets, but it will be complemented nicely by the ETF share class.
Historically, we really haven't seen people migrate from one to the other. They tend to attract different investors. The financial advisor community really prefers the ETF share class, and bring their clients in through that portal. And then, we have a very strong direct investor base that typically comes through the direct share class, the conventional share class.
So, we really want to be indifferent as to which share class investors go into. It would just make it convenient for them.
Culloton: The expense ratio for the traditional share class is still around 18 – mid to high teens, 18 basis points, so about three times more expensive than the ETF share class. A lot of traditional funds have come out in recent years slashing their expenses down to 9 or 10 basis points. Why hasn't Vanguard responded by lowering the expenses for the traditional share class so far of the 500 fund?
Sauter: Yeah. We operate at cost. Everything we do is basically designed to break even. So, we figure out what our costs are for offering a share class, and then set the expense ratio based on that. That has enabled us to provide very low-cost index funds and active funds as well, but at the same time, it keeps us at certain levels. We really don't subsidize a portfolio or a share class to get it down to a certain level. It really has to be closely tied to the cost of that share class.
So, we become indifferent as to which share class the investor prefers because either way we're charging whatever it costs us and we just want to make it more convenient. We do have a number of different share classes for individual investors. So, we have the Admiral share class. It is lower cost than the Investor share class that you are describing, and that reflects our costs, the economies of scale of that particular share class. So, we do have different share classes for different investors who recognize the economies of scale of those particular share classes.