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The Malvern, Pa. giant is just doing what it always does, CEO Bill McNabb says, and it isn't just 'another volley fired in the fee war'
December 27, 2016 — 5:27 PM UTC by Brooke Southall
Brooke's Note: When we talk about the lowering of RIAs fees -- or at least restructuring them so that they better reflect the value being delivered by advisors -- one thing that continues to obscure the need for reimagining fees is a compliant stock market. See: Fidelity warns on the fees RIAs charge as growth of their practices falter yet lower prices aren't the answer. Still, it's a fickle friend. A better friend to RIAs is the one that ineluctably lowers all-in investor fees without RIAs having to absorb the cost -- namely the vigorous price chopping by makers of index products. What's new about it is that everybody, including Schwab, Fidelity, BlackRock and Goldman Sachs -- is doing it. This puts Vanguard the funny position of having to offer a deeply explanatory CEO-fortified press release for something it's done for about as long as I have celebrated Christmas. Great news for investors -- and a windfall for RIAs, too.
The Vanguard Group found itself in uncharted waters in 2016 when it came to selling indexed products -- being outpriced by some rivals like Schwab and Fidelity on certain products.
No wonder that the Malvern, Pa.-based deep-discount, not-for-profit indexer felt the need for an explanation via its CEO, Bill McNabb, last week when it announced some hyper-competitive price cuts.
“While some will portray Vanguard’s expense ratio reductions as another volley fired in the fee war, we view it as business as usual. We’ve been lowering the cost of investing for four decades and will continue to do so,” said McNabb in release.
McNabb defends his company's one-upmanship -- or is it one-downmanship -- vis a vis fees by showing how the company did nothing out of character -- and that the price chops were not token in nature. See: Why Vanguard Group has proved impervious to a '$34.6 billion' whistleblower suit and why nobody's suggesting Vanguard execs should breathe easy
From the heart of four decades
“We’ve been lowering the cost of investing for four decades and will continue to do so,” said Vanguard CEO Bill McNabb. “Importantly, we have announced reductions across our product offerings — mutual fund and ETF, index and active, stock and bond, domestic and international."
Certainly, Vanguard's cuts contrast with the cuts in iShares prices reported by Bloomberg and other news outlets yesterday.
BlackRock Inc. just unleashed withering price cuts of as much as 20 basis points as part of a broader pruning of six of its 17 smart beta exchange-traded funds, according to SEC filings picked up by Bloomberg.
Nobody can doubt that BlackRock is reacting, in part, to fellow big banger Goldman Sachs, which entered the smart beta ETF world a couple years ago in deep-discount territory -- and got traction. Goldman already has more than $2.6 billion of assets and its smart beta ETFs remain cheaper on average than those of BlackRock. The wild ride that Goldman Sachs took to launch its first ETF -- one that even an RIA could love?
In contrast to McNabb, the statement issued to Bloomberg by Paul Young, a BlackRock spokesman, was as banal as the English language permits. Investing 'factors' are tiny edges discovered through investment research that help smart indexes do better in theory than indexes over time. “We regularly review our line-up of iShares ETFs to ensure we offer quality exposures at competitive prices to meet the needs of our clients.”
New York-based BlackRock's price chops apply to factor ETFs including iShares Edge MSCI Multifactor USA ETF, iShares Edge MSCI Multifactor USA Small-Cap ETF, and iShares Edge MSCI Multifactor International ETF.
Never-fail fee strategy
Do price chops on ETFs work? Yes, actually.
In October, BlackRock prices on 15 stock and bond funds aimed at buy-and-hold investors. Since that time, those offerings have pulled in $17.9 billion in assets, according to Bloomberg data, in this article.
But that positive reinforcement is but a taste of what Vanguard has achieved over several decades by following that strategy.
In 1975, when Vanguard managed $1.8 billion in U.S. fund assets, the average expense ratio for the Vanguard funds was .89%. Today, Vanguard manages $3.6 trillion in U.S. fund assets and the average expense ratio is .18%, or less than one-fifth that of the 1.01% industry average. On an asset-weighted basis, the average expense ratio is even lower—.12%, compared to 0.55% for the industry.
In 2004, when Vanguard managed $6 billion in ETF assets, the average expense ratio for Vanguard’s ETFs was .22%. Today, Vanguard manages $593 billion in U.S. ETF assets. The average expense ratio of the firm’s ETFs is .12%, or less than one-third that of the .53% industry average. On an asset-weighted basis, Vanguard’s average expense ratio is even lower at .10%
Yet Vanguard's latest fee chops may be among its greatest ever -- at least on a percentage basis:
- Twenty-four Vanguard bond index fund shares reported lower expense ratios including the $18.7 billion Vanguard short-term corporate bond index fund with these cuts: Admiral shares, three basis points to 0.07%; ETF shares, three basis points to .07%; and institutional shares, two basis points to .05%. A basis point is one-hundredth of 1%.
- Four size/style index fund shares that seek to track CRSP benchmarks reported lower expense ratios. The largest of these funds, the $2.3 billion Vanguard Mega Cap Growth Index Fund, reported that the expense ratios of its Institutional Shares and ETF Shares declined by two basis points, to .06% and .07%, respectively -- or about 25% reductions.
- Two social index fund shares reported lower expense ratios. The $2.4 billion Vanguard FTSE Social Index Fund reported that the expense ratio of its investor shares fell three basis points, to .22%, while that of its institutional shares fell three basis points, to .12%.
- Three actively managed domestic fund shares reported lower expense ratios. The largest of these funds, the $6.6 billion Vanguard U.S. growth fund, reported that the expense ratios of its Investor and Admiral shares declined by one basis points to .46% and .32%, respectively.
- Two actively managed international fund shares reported a lower expense ratio. The $21.5 billion Vanguard international growth fund, reported that the expense ratios of its investor shares and Admiral shares declined by one basis point to .46% and .33%, respectively.
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