Can Vanguard Still Compete on Fees?

Susan Dziubinski: Vanguard is perhaps best known for those two things of low costs and indexing. So, let’s talk a little bit about those two things. Now, as competition for investor dollars has of course heated up, especially in the last decade, we’ve seen fund fees fall across the industry as investors are seeking out those lower-cost choices. So, how does Vanguard look on the expense front comparatively speaking these days? Does it still really deserve that reputation as the low-cost provider?

Alec Lucas: If you look across the board across the lineup, the answer is definitely. If you look at individual options, the answer is, it’s pretty competitive. But what Vanguard has essentially done in finance lingo is it’s democratized beta. Vanguard has given investors very cheap access to broad diversified funds. And its biggest competitors—so, think BlackRock’s iShares business, think Fidelity, think Schwab—they’ve either matched or, in some cases, undercut Vanguard on fees. Fidelity has a free index fund. If you look at individual options, you might beat Vanguard. But across the board, Vanguard is, I think, still the low-cost provider. Its U.S. average fund-weighted expense ratio is 8 basis points. By contrast, the industry average is 47 basis points. One of the things Vanguard likes to do is it compares how much has it saved investors based on its monthly, say, average assets over 2022 relative to the industry average. And if you do that calculation, it saved investors collectively about $26 billion in 2022. So, across the board, and if you add in advice, it is still incredibly competitive.

Vanguard’s Top Funds

Dziubinski: Let’s talk a little bit about the lineup of index funds and ETFs. Now, it seems like, as you alluded to, a very comprehensive lineup, and a significant number of those index funds and ETFs earn Morningstar’s highest rating of Gold. Why do their index products rate so well when it comes to how Morningstar is evaluating these products?

Lucas: They’re inexpensive, they’re tax-efficient, and they track their indexes closely. Vanguard stays on top of the indexes that its passive funds track and will change them when it thinks a better one is available. The other thing they do that’s really distinctive is they make money through securities lending, and then they funnel that money back to their investors. So, Vanguard’s Total Stock Market Index Fund VTI made about 2 basis points on average back of its expense ratio in its last fiscal year. So, it costs 3 basis points. It made a little more than 2 basis points back. So, the all-in cost for investors was just under a basis point.

Dziubinski: Wow. OK. We’ve talked about this before in prior conversations, Alec, but it bears repeating. Although Vanguard is perhaps best known for its index funds, it actually has a pretty strong stable of actively managed funds. For those viewers who may be less familiar with how Vanguard structures those, talk a little bit about the structure and perhaps name-drop a couple of the actively managed funds that Morningstar rates particularly highly.

Lucas: Vanguard built its business off of Vanguard Wellington VWENX, which is an actively managed balanced fund. Vanguard 500 VFIAX that tracks the S&P 500 was sort of slow to grow. So, its business was really built on Vanguard Wellington, Vanguard Wellesley VWIAX, Vanguard Windsor VWNEX, those types of funds. Currently, we rate 60 actively managed Vanguard funds. Fifty-seven of them are Morningstar Medalists of either Gold, Silver, or Bronze, and one is Under Review. So, there’s only two that are Neutral.

High Parent Pillar Rating

Dziubinski: Morningstar assigns also asset managers what we call our Parent ratings, and Parent ratings really represent how well a fund group aligns its interests with those of its fundholders. Now, Vanguard is one of the few fund families that we assign Parent ratings to that earns our highest rating of High. So, let’s talk a little bit about why the firm rates so well according to our rating system for parents and what it does better, perhaps, than other families who don’t rate quite as highly.

Lucas: I’d point to its purpose and its structure. Its purpose is to take a stand for all investors, treat them fairly, and give them the best chance for investment success. And that’s more than marketing speak to Vanguard. When you talk to the people there and talk to them over multiple years as I have, it’s clear that that is their purpose. It’s what motivates them to work there. And its structure, of course, as I mentioned previously, is it’s owned by its U.S. mutual funds. So, indirectly, it’s owned by its U.S. investors, and then it extends that ownership culture to its non-U.S. investors. And if you think about sort of the standard industry player in the asset-management industry, it’s trying to make money for its investors, sure, but it’s also really trying to make money off of them. Vanguard is trying and exclusively focusing much more on making money for them.