Vanguard's Latest Fee Cuts in 4 Charts

This article originally appeared in Morningstar Direct Cloud and Morningstar Office Cloud.

The pace of fee cuts on passively managed funds may have slowed in some corners of the fund universe, but not at Vanguard.

Vanguard revealed on Feb. 26 that expenses on 10 of its exchange-traded funds would be lower in 2019 thanks to economies of scale as the funds have grown. Though the changes are small on an absolute basis--just 1 or 2 basis points each--five of the funds will now sport single-digit expense ratios.

Vanguard has a consistent track record of lowering fees as funds grow in size, which puts pressure on other ETF providers to follow suit and widen the gap between expenses on its offerings and many actively managed funds. This has been good news for investors broadly, as the price war among ETF providers has led to a dynamic where some fund companies are offering even lower-cost funds than Vanguard.

But Vanguard continues to press its advantage as a mutual-ownership structure that allows it to quickly pass on efficiencies of scale to fund shareholders.

Here's a look at some of the Vanguard ETFs that announced lower fees. In these charts, we compare the progression of fee cuts on the Vanguard funds against competitors. For one set of comparisons, we're focusing on passively managed funds with a similar strategy. For the other comparison, we're highlighting fees on an actively managed competitor. In both cases, we've chosen funds that are either the largest in their Morningstar Category by assets or come close to the strategy offered by Vanguard and are also among the largest in size.

The largest of the Vanguard offerings to unveil lower fees is Vanguard Total International Stock ETF VXUS, which cut its expense ratio to 9 basis points from 11. This ETF and the original open-end version have seen tremendous asset growth. At the end of 2009, the overall strategy had $26 billion in assets; it now has $354 billion. The ETF, launched January 2011 with an expense ratio of 20 basis points, currently accounts for $11 billion of these assets.

In this chart, we show the path of VXUS' fees against the $35 billion Oakmark International OAKIX, the $57 billion iShares Core MSCI EAFE ETF IEFA, and the $24 billion Fidelity International Index FSPSX funds.

While VXUS highlights the downtrend in fees at Vanguard, it also marks one of the examples where Vanguard has been undercut on cost.

Vanguard also announced a reduction in fees on Vanguard FTSE Emerging Markets ETF VWO. In this chart, we compare VWO, which has $60 billion in assets, against two emerging-markets ETF competitors, the $59 billion iShares Core MSCI Emerging Markets ETF IEMG and the $2.7 billion SPDR Portfolio Emerging Markets ETF SPEM.

Ten years ago, VWO charged investors 27 basis points. The new expense ratio is 12 basis points, recently down from 14. That makes VWO 2 basis points cheaper than the iShares ETF. Meanwhile, VWO is 1.17 percentage points cheaper than the largest actively managed emerging-markets fund, the $40 billion Oppenheimer Developing Markets.

The dividend investing landscape offers investors a wide range of low-cost options. But in the chart below we again see how Vanguard starts off with low fees and then continues to push them lower.

Ten years ago, Vanguard High Dividend Yield ETF VYM charged 25 basis points and held $484 million in assets. With the latest fee reductions, the ETF, now with $29.9 billion in assets, is down to a cost of 6 basis points.

VYM does have competition breathing down its neck in the form of the $6.8 billion iShares Core High Dividend ETF HDV. (HDV’s benchmark is the Morningstar Dividend Yield Focus Index.) But SPDR S&P Dividend ETF SDY, at $18 billion in assets, charges 35 basis points. The dividend-focused T. Rowe Price Equity Income PRFDX, with $20 billion in assets, has expenses of 65 basis points.

The final chart shifts to the focus to the bond market. Vanguard Total International Bond ETF BNDX cut its expenses to 9 basis points from 11. Four years ago, BNDX charged 19 basis points. Over this time, the ETF version of the strategy has grown to $13 billion in assets.

In this instance, Vanguard's fee reductions have actually lagged those of competitor iShares Core International Aggregate Bond ETF IAGG.

However, the largest actively managed fund in the space, Templeton Global Bond TPINX, has seen its expenses rise as assets have fallen to $34 billion from north of $70 billion in 2013. In fact, its expenses are higher now than a decade ago when the fund had $25 billion under management.