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Vanguard: Low Fees for the Average Investor

Screen Shot 2016 12 12 at 4.55.33 PM
Screen Shot 2016 12 12 at 4.55.33 PM

If you’re looking for a story about a financial company that did well by actually taking care of its customers, look no further than Vanguard and its founder, John C. Bogle. And by “did well,” we’re talking “largest provider of mutual funds in the world” well.

Best of all, they did it by cutting down on the unnecessary fees that most companies charge for mutual funds. Like, way down. In fact, if you’ve ever heard of index funds, you’ve heard of Vanguard. Their founder, John Bogle, is credited with creating the first-ever index fund.

How did this even happen?

Let’s start at the beginning. Vanguard was founded in 1974 by John C. Bogle, who was convinced there was a better way for investors like you and me to buy into the market. He came into the industry at a time when the only “accessible” option for regular people was to pay a (very) high price for actively managed mutual funds.

He worked in that world before starting Vanguard, and when he had the chance to create his own fund, he was convinced that offering a low-cost mutual fund was the way to go. He built Vanguard’s first fund to match the performance of the Standard and Poor’s 500 (S&P 500) – not to beat it like everyone else was trying to do.

This approach let Vanguard offer low fees, because the work of picking stocks was already done for them. All they had to do was hold the same stocks that were in the S&P 500, in the same proportions. Bogle knew that those lower fees would mean higher returns for the average investor, and that most of the high-priced actively managed funds didn’t even beat the S&P 500 returns every year. Offering a low-cost way to match the performance of that stock index seemed like a no brainer, and the first index fund was born.

It took a while to take off, and many people inside and outside the industry were skeptical of his approach. However, it took off, and how.

Where Vanguard stands today

Even now that ETFs and index funds are widely accepted, and a great way for people to buy into the market without trying to beat it, Vanguard remains the widely-recognized leader in low-cost ETFs and mutual funds. That’s the power of a first-mover advantage, and a different approach to finance.

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And when I say different, I mean very different. Vanguard as a company is wholly owned by the funds and ETFs they offer, so the company is owned by every person who buys one of their funds. Since their investors are also their owners, it’s in Vanguard’s best interest to do right by you if you own their funds.

Cool.

That’s why they’re so competitively priced, even when it comes to the wide range of options available in the market today for passive investing. As of December 31, 2015, Vanguard’s mutual funds had an average expense ratio of just 0.18 percent. For context, the industry average for a mutual fund expense ratio is a whopping 1.01 percent.

When you get into the world of ETFs, Vanguard still wallops the competition. Their average ETF expense ratio is 0.12 percent, compared to the industry average of 0.53 percent. Those low fees will save you thousands over the next few decades – seriously.

Wait, I’ll save thousands?

These expense ratios are how much you pay to hold an investment on an annual basis, but it’s easy to look at percentages and feel like there’s only a tiny difference between 0.12 percent and 0.53 percent. In reality, the difference is pretty huge. 

That’s why Vanguard wanted to make it crystal clear just how much the fees you pay matter. They have a tool on their website that shows you the real, dollars-and-cents cost of higher fees when you’re investing. Let’s say you have $50,000 to invest right now, and you’re going to leave it invested for 30 years. If your investments grow at 6 percent every year, and you’re invested in Vanguard funds with an average expense ratio of 0.12 percent, you’ll pay $10,160 in fees over those 30 years to Vanguard.

But let’s say you’re in the exact same situation, invested in funds with the industry average cost of 0.53 percent. In that case, you’ll pay $42,319 in fees over 30 years. That’s over four times as much money, for the same performance.

Yikes.

So… how do I get in on this?

If there’s one thing that’s clear, it’s that Vanguard isn’t about that charging-high-fees life. If you’re on board, and want to invest in Vanguard funds literally yesterday? You can do it from the comfort of your couch, thanks to their online brokerage option.

It’s a fairly standard online brokerage, that offers you a range of mutual funds and ETFs, including the ultra-competitively priced Vanguard ETFs. There are no commission fees to trade low-cost Vanguard ETFs if you use their online brokerage, and as long as you opt for online delivery of your account statements, you won’t pay any annual fees for your account either.

If you really must have a paper statement delivered to you, it’ll cost you $20 a year – but who wants to hold on to paper statements these days anyways?

So if you want to run with the cool, passive investors? Get thee a Vanguard account, stat.

 

Have something to add to this story? Comment below or join the discussion on Facebook.

Header image: Shutterstock

*This piece is meant only to expand awareness of available financial tools and products and should not be considered an official endorsement of the product or its outcomes by GenFKD.

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