The result: Its average asset-weighted expense ratio is now 0.07% — a fraction of the industry average of 0.44%.
“Fee cuts are always a positive sign,” Daniel Sotiroff, a senior research analyst at Morningstar, told Yahoo Finance. “The impact for Vanguard’s investors is positive, but it isn’t going to be huge, largely because its fees are already really low.”
Some of the funds on the Vanguard slash list include: Russell 1000 Value ETF (VONV), down to 0.07% from 0.08%; International High Dividend Yield ETF (VYMI), down to 0.17% from 0.22%; Total Bond Market Index Fund (VBTLX), down to 0.04% from 0.05%; Emerging Markets Government Bond ETF (VWOB), down to 0.15% from 0.20%; and Vanguard Dividend Appreciation ETF (VYM), down to 0.05% from 0.06%.
To really understand why you should care about reduced fees — even by fractions of a point — you need to know what a low expense ratio actually means.
“Vanguard’s fee cuts are a win for retail investors — you and me — helping to boost long-term returns,” said Mark Johnson, an investments and portfolio management professor at Wake Forest University. “In today’s market, expense ratios under 0.10% (10 basis points) are considered low, and Vanguard’s announcement aligns with founder Jack Bogle’s philosophy of maximizing returns by minimizing costs.”
Low fees on mutual funds and ETFs matter because they leave more money invested and compounding over time. (Getty Creative) ·Abdullah Durmaz via Getty Images
That clearly remains the company’s mission: “At Vanguard, we’re focused on creating value for our investors, not extracting value from them,” Salim Ramji, Vanguard’s CEO, said in a press release.
I’d be remiss not to mention that this massive fee cut comes on the heels of Vanguard agreeing to pay more than $106 million to the Securities and Exchange Commission “for misleading statements related to capital gains distributions and tax consequences for retail investors who held Vanguard Investor Target Retirement Funds (Investor TRFs) in taxable accounts,” according to an SEC order.
The blow to Vanguard’s revenue from the new expense ratio cuts — estimated to be about $350 million this year — is the bigger thing that matters in my opinion.
“It shows that Vanguard is willing to give up a pretty substantial amount of revenue this year, and in future years, for the betterment of its clients,” Sotiroff said.
Moreover, you could see some fee competition kick up.
“There were some low-cost index funds in Vanguard’s list that are now a few basis points cheaper than comparable funds from competitors, particularly on broad international stock ETFs,” said Sotiroff.
“I’d be watching for announcements from BlackRock, State Street, and Charles Schwab to see if they make any cuts in the near future.”
But you won’t find what is under the covers of that expense ratio.
It’s not spelled out in your account statement in the way a service fee or trading commission is shown.
The specific details on the expense ratio fee that will be deducted from your investment returns can be found in a prospectus, which each mutual fund and ETF files with the SEC. You can track down that document on the fund’s site.
Simply put, expense ratios account for a range of costs including what a mutual fund or ETF pays for management advisory fees as well as fees that pay for the cost of marketing and selling the fund and other shareholder services, transfer-agent costs, and legal and accounting fees.
The total annual fund operating expenses are expressed as a percentage of the fund’s net average assets, not a flat dollar figure.
As each fund passes its fiscal year-end, the annual expense ratio is calculated by dividing the fund’s operational expenses by its average net assets. These expenses are pulled from dividend and capital gains distributions you would receive, not the principal, according to Vanguard’s fund data.
Fees have been falling in recent years. In 2023, index equity mutual funds had an asset-weighted average expense ratio of 0.05%, or just $5 for every $10,000 invested, according to research by the Investment Company Institute. Compare that to 0.42%, or $42 for every $10,000, for actively managed equity mutual funds.
“Many investors understand that low fees matter because they leave more money invested and compounding over time,” Johnson said.
I’m not convinced of that. While many folks may be hip to fees, they don’t focus on the reality of the dent they make in their future nest eggs.
No matter how minuscule that expense ratio may appear, it has an outsized impact on your investment returns over time. When you’re saving for retirement, that’s the heart of it.
Consider this: You’re 35 years away from retirement and have a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account, according to calculations by the US Department of Labor.
If fees and expenses are 1.5%, however, your account balance will grow to just $163,000. The addition of a mere 1% annually over a 35-year span can cut your retirement account by 28%.
The Financial Industry Regulatory Authority (FINRA) provides a fund analyzer on its site to help you run the cost comparisons between thousands of mutual funds and ETFs.
Vanguard CEO says he expects to offer more advice to meet the needs of retirees as demand grows. (Getty Creative) ·shapecharge via Getty Images
As investment management companies compete to attract clients with low-fee fund options, Johnson predicts they’ll try to cross-sell clients on additional services once they join.
Cue Ramji’s recent interview with the Wall Street Journal: “As clients enter retirement and they’re thinking about income, they’re thinking about other sets of things that they might not have thought about during the accumulation days — their desire for advice grows, and we want to offer more of that capability at Vanguard,” he said.
Just this week I received an email from Vanguard touting its “suite of advisory services” offering “a range of support to prepare a future for your beneficiaries, from tax-efficient strategies and portfolio management to retirement planning and advice tailored to you.”
I was curious enough to explore my options, whether I wanted automated investment management or an adviser who could serve as my “personalized sounding board.”
I discovered I could pay an annual advisory fee of $15 for every $10,000 I had invested at Vanguard to have access to a robo-advisor or $30 for every $10,000 invested as long as I had at least $50,000 in Vanguard accounts for a hybrid personal adviser and robo-helper.
If I had $500,000 or more invested with the firm, I’d shell out no more than $30 per $10,000 invested to work directly with a certified financial planner and get a personalized plan.
Not bad. At least, I would know upfront how much I’m paying in fees.
