DUBLIN — In the US, the world’s biggest investment market, competition is fierce. And that’s good for consumers. Over the last few decades, the emergence of index funds and ETFs has led to falling asset management fees, not just on index products but on actively managed funds too. This is good news, because fees are an investment killer. Some research I’ve read estimates that worldwide, asset managers capture as much as 75-80% of any out-performance they generate in the form of fees (and they hardly ever generate out-performance). In other words, if you invest in an active fund that performs well, most of that out-performance goes to the fund manager, not you. What’s worse, when the fund performs badly, you still pay fees. This is great for the fund manager, who gets paid no matter what, but terrible for investors, who lose out on both ends of the performance curve. Now, obviously, fund managers need to make a living. But they shouldn’t make a living by doing the opposite of their job – if their job is to make money for investors, their fees shouldn’t be so high as to make this almost impossible. That’s why it’s very satisfying to see the tide turning in the US and, to a lesser extent, Europe. Bring on the cheap funds. In South Africa, investors have access to some great low-fee options, but active fund fees remain high by global standards (especially compared to the US). The bottom line is that, as a consumer, you should be vigilant about fees. Make sure you look at performance net of fees. Avoid funds that charge active fees but have a portfolio that basically replicates the Top 40, you’d be better off in a cheap ETF. Make sure you understand how your financial advisor is being paid – some bad eggs recommend products to clients based entirely on how juicy their own fees will be, not on the client’s needs. Maybe if enough investors get smart about fees, we’ll see them fall in line with the rest of the world. – Felicity Duncan
Vanguard Ups the Ante in an ETF Race to Zero
By Asjylyn Loder
(The Wall Street Journal) Vanguard Group is cutting management fees on 10 exchange-traded funds, the latest money manager to trim fees on a host of investment products.
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The ETFs, with combined assets of almost $175bn, include funds that invest in international stocks and bonds. The biggest is the $62bn Vanguard FTSE Emerging Markets ETF, which will cost $12 a year for every $10,000 invested. That is down from $14, making it cheaper than a competing ETF from BlackRock Inc.’s iShares Core lineup. In addition, 43 Vanguard mutual funds are also reducing fees.
The price cuts were disclosed in new regulatory filings Tuesday.
“A broader and broader base of investors are using ETFs, and that’s pushing more assets into these funds,” said Rich Powers, head of ETF product management at Vanguard. As the funds grow, economies of scale allow Vanguard to pass savings along to investors, he said.
Vanguard’s move is the latest in an escalating fee war in ETFs, where the cheapest funds typically raise the most money. Filings due within the next week for eight other Vanguard ETFs, with a total of almost $440bn in assets, could show additional fee cuts.
The price war is going well beyond ETF-management costs and into a host of other investment products. Vanguard has been at the forefront of the trend for decades, continually cutting the costs of investing. The focus on lower fees has made the money-management giant in the Philadelphia suburb of Malvern the second-largest asset manager in the world.
Vanguard’s success has forced its competitors to match its ultra-low prices, a trend often called “the Vanguard effect.”
Last year, Fidelity Investments grabbed headlines by introducing a zero-fee lineup of mutual funds, kindling speculation that a free ETF wouldn’t be far behind.
Online lender Social Finance Inc. said Monday it planned to start the first zero-fee ETFs. But there’s catch: The fees are only being waived for the first year. After that, they could rise to $19 a year for every $10,000 invested, the filing shows.
The cheapest US stock ETFs now cost $3 to $4 a year for every $10,000 invested.
The price paid for index funds that invest in big US companies barely budged in 2018, but there remains steady competition in segments like bonds and emerging markets, according to a report earlier this month from Morningstar.
The price wars also have expanded into new areas of asset management, like advice and brokerage. Earlier this month, Charles Schwab Corp. and Fidelity Investments doubled the number of ETFs that are exempt from trading commissions on their brokerage platforms.
To be sure, management fees aren’t the only factor investors use when choosing a fund. They also have to factor in tax implications, trading costs and fund strategy. Vanguard’s emerging markets ETF doesn’t include South Korean stocks – unlike the competing iShares funds – because the funds follow different index methodologies.
Investors also have shown a willingness to pay a little more for index strategies that try to smooth out market turbulence or pick the best-run companies.
Write to Asjylyn Loder at [email protected]
