![]() And it has ensured that the firm remains extremely picky about the fund managers it hires. That high hurdle has helped Vanguard avoid risky niche offerings, such as leveraged funds, which use debt and derivatives to amplify gains (and losses, too). We are looking for a product that will meet investors’ needs for a decade,” he says. Dan Reyes, who heads Vanguard’s portfolio review department, says his team takes months, and often years, to study the advisability of a potential new fund. Vanguard has been slow to add new funds, for example. That has helped the company build a stable of top-notch funds and saved it from some fiascos - but it has also meant sometimes playing catch-up as the investment market has evolved. Vanguard customers collectively get to keep at least $26 billion a year more than they would if the company charged the industry’s average expense ratio of 0.47%, Lucas calculates.ĭespite its bold history, Vanguard is extremely cautious in many other aspects of its operations. Those strategies have forced competitors to offer better deals to their customers, says Morningstar’s Lucas. For example, the fees from securities borrowers added 0.02% to the return of its Total Stock Market Index Fund, offsetting most of that fund’s 0.03% expense ratio. What’s more, Vanguard raises the returns on its funds with the interest it earns on lending securities to other brokerages or short sellers. Because it didn’t have to worry about funneling customer cash to owners, Vanguard chipped away at its expense ratio so that today its investors pay an average fee of just 0.08%, or a 12th of a penny for every dollar invested. When Vanguard launched in 1975, the average fund subtracted about three-fourths of a percentage point from an investor’s portfolio annually. Fund sponsors generally make their money by deducting expenses from investors’ portfolios (calculated as a percentage of assets, known as the expense ratio). Vanguard’s third crucial strategy was sparking a fund-management-fee price war. Competitors criticized the index fund as “un-American.” Today, index funds hold a majority of fund assets. Every other retail mutual fund at that time was run by a professional manager who chose stocks for the fund, trying to beat the market. The Vanguard 500 simply passively tracked the S&P 500 index. It also enabled Vanguard to avoid the bubbles and scandals that have made many investors cynical about Wall Street.īogle’s 1976 launching of the first retail index fund got much more attention. That means it is owned not by stockholders or an individual, but is investor-owned, meaning fund shareholders own the funds, which in turn own the parent company.īogle argued this freed Vanguard from the conflicts of interest that plagued its competitors, who were expected to return big profits to their owners, often at the expense of their customers. Perhaps the most important yet least appreciated of these decisions was to structure Vanguard as a mutual company. A look back at VanguardĪt the outset, Vanguard took some daring and, in retrospect, wildly successful risks - on an unusual corporate structure, a new kind of investment, and a profit-slashing price war. “Vanguard has to get their act together,” he says. Though he holds some Vanguard funds in the new account, he has also invested in the new firm’s low-cost funds. Recently he moved about two-thirds of his savings to another brokerage because it offered more-responsive phone service and more-robust apps and web services. Berger used to hold almost all his money at Vanguard. But they are a victim of their own success,” says Rob Berger, a retired attorney and author of Retire Before Mom & Dad. ![]() I am a ‘ Boglehead.’ I am their biggest fan. ![]() The experience of one prominent Vanguard customer illustrates what the firm is up against. Alec Lucas, Morningstar’s lead Vanguard analyst, calls the firm the “Aldi” of money managers, likening it to the discount grocery chain that is beloved by bargain shoppers but offers bare-bones service. Vanguard customers have complained about slow, inconvenient service and clunky technology for years. It has focused so much on fund management and cost-cutting, it has long underinvested in the kinds of technology and customer service systems needed to serve 21st century investors. Some analysts and longtime customers worry that Vanguard may have trouble winning this next round, however. ![]()
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