Is Vanguard Really the Cheapest Fund Provider?

Vanguard Group, long known as a low-cost index mutual fund pioneer, faces real price competition for certain individual investment products today but continues to lead the industry overall as a low-expense provider, a Morningstar analyst says.

Looking at Vanguard’s entire lineup, the fund giant “definitely” deserves its reputation as the industry’s low-cost provider, Alec Lucas, Morningstar’s director of manager research and lead Vanguard analyst, said in a recent video interview on the research firm’s website.

“But what Vanguard has essentially done in finance lingo is it’s democratized beta. Vanguard has given investors very cheap access to broad diversified funds. And its biggest competitors —so, think BlackRock’s iShares business, think Fidelity, think Schwab — they’ve either matched or, in some cases, undercut Vanguard on fees,” he said in the chat with Morningstar investment specialist Susan Dziubinski.

“Fidelity has a free index fund,” Lucas explained, according to the video transcript. “If you look at individual options, you might beat Vanguard. But across the board, Vanguard is, I think, still the low-cost provider. Its U.S. average fund-weighted expense ratio is 8 basis points. By contrast, the industry average is 47 basis points.”

Vanguard compares how much it has saved investors based on its monthly average assets over 2022 relative to the industry average, he noted. That calculation shows that Vanguard saved clients collectively about $26 billion in 2022, he said.

“So, across the board, and if you add in advice, it is still incredibly competitive,” Lucas said.

A significant number of Vanguard’s index mutual funds and ETFs earning Morningstar’s highest rating because “they’re inexpensive, they’re tax-efficient, they track their indexes closely. Vanguard stays on top of the indexes that its passive funds track and will change them when it thinks a better one is available,” Lucas said.

“The other thing they do that’s really distinctive is they make money through securities lending, and then they funnel that money back to their investors. So, Vanguard’s Total Stock Market Index Fund VTI made about 2 basis points on average back of its expense ratio in its last fiscal year. So, it costs 3 basis points. It made a little more than 2 basis points back. So, the all-in cost for investors was just under a basis point.”

Morningstar also has awarded Vanguard its highest “parent” rating, which measures how well a fund group’s interests align with its investors. Vanguard aims to “take a stand for all investors, treat them fairly, and give them the best chance for investment success,” according to Lucas, who said the firm considers that goal more than “marketing speak.”

(Image: Bloomberg)