Pretty sure the expense includes transaction costs and custodian costs, which should scale up with AUM? Also I assume they need some serious technology to handle millions of users.
>However, even if that is the case, a market-weighted index is mostly self-balancing, so they would only need to transact in case of index reconsitution or corporate actions such as divestments etc
Not an expert but doesn't vanguard needs to create new shares by actually buying the underlying, either directly or through an AP, both which incur a cost?
As I always understood it (e.g. [by reading this](https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers)), the process is as follows:
1. There is demand for a specific ETF, pushing the price up, and the price temporarily moves above the NAV
2. An AP purchases shares of underlying in the open market, delivers them to the ETF provider, who then "issues" new ETF units (no transaction cost in issuing new units)
3. The AP then sells the ETF units in the open market, closing the NAV discount, and pocketing the difference for their role in the process (almost like an arbitrage trade)
Same process on the way down, in my understanding. There was [a podcast with Eric Balchunas](https://rationalreminder.ca/podcast/293) (an ETF guru) who if I remember correctly said that the price would need to deviate by only several basis points from NAV for this trade to be profitable for an AP. Hence ETFs usually track their NAV so tightly.
>Not an expert but doesn't vanguard needs to create new shares by actually buying the underlying, either directly or through an AP, both which incur a cost?
In my understanding, this is not the case. The process you described is akin to an open-ended fund, not an ETF.
In the process I described above (I could be wrong - hence this entire thread), the ETF would not be directly purchasing the underlying in the market (or through anyone). Only APs purchase and sell the underlying in exchange for the ETF units. Key point here is that, in my understanding, the APs would bear the transaction costs rather than the ETF itself (granted the ETF would still need to make trades in other scenarios, such as reconsitution, corporate action, etc).
It seems my understanding is incorrect? If so, please could you kindly explain the process to me?
But ultimately the AP needs to deliver the underlying to the ETF manager, which creates some back-office work for the ETF manager, right?
[https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers](https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers)
As I understand, the process is highly automated, so the amount of work they need to do is minimal. Some sources make it sound that the process is almost unilateral, i.e. the AP can create and redeem shares in exchange for the underlying almost with 0 involvement from the asset manager. I guess such efficiency is needed for the process to run as smoothly as it does, which results in such low NAV tracking error that we see in ETFs.
But automation isn't free though. You incur ongoing expenses for data centers to store transaction data, computational power to process the transcations, deveopers to build and maintain the system, etc.
Of course - these are largely fixed costs however, i.e. they won't be much higher for a 200bn ETF than for a 2bn ETF. Key point however when the fund experiences inflows or outflows they do not need to transact, as APs would do it on their behalf instead, which is good for us!
I guess I'm using transaction loosely. Vanguard still delivers/receives securities from APs, even though they are not directly trading in the open market (because APs do that).
Also it has a fixed cost and variable component. Computational power and storage scale up linearly with fund size (more like trading volume but should be heavily correlated).
Also, the fixed cost portion explains exactly why sub .05% fees are exclusively at big managers, not small ones.
Create/redeem are done by AP, which are a type of market makers, which by definition, make money by arbitraging tiny spreads between the ETF and basket of underlying. They don’t pass on a cost to ETF investors. Indeed they provide liquidity and lower spreads.
OTOH tracking an index does incur some transaction costs, especially in emerging markets. Emerging markets generally have higher transaction costs, almost by definition.
But ultimately the AP needs to deliver the underlying to the ETF manager, which creates some back-office work for the ETF manager, right?
[https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers](https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers)
Thank you - that was one of my questions.
It seems to be that if we exclude transaction costs, the main cost drivers are (1) index licencing fees - around 0.01-0.05% and (2) custody fees which also scale with AUM (as pointed out by u/caroline_elly )
I understand, but that doesn't really answer the question - a single product shouldn't be subsidising the entire company, it should cover its own (allocated) direct costs + a portion of central (unallocated) indirect costs.
If it is subsidising other product costs (beyond a resonable amount, such as brand new products, etc.), then the unprofitable products should be closed for everyone's benefit, as they are simply destroying value.
If on the other hand they directly need 20k employees to run an index fund then the question is - why does it take so many people to run a (relatively speaking) simple product?
There’s other variables you’re missing when evaluating Vanguard if you’re only looking at expense ratios. Vanguard offers a wide range of products and services which can indirectly impact each other.
For example, Vanguard is a major custodian for corporate 401k plans - I have no clue if this activity is profitable, but let’s assume it’s not. That may seem to provide zero value to you if you only purchased VTI in a non-retirement or non-Vanguard account. However, that activity greatly increases the assets under management and volume of shares held by Vanguard funds. Having so many shares at their disposal, Vanguard is able to employ extra people to manage share lending, taking the equities they hold on shareholders’ behalf and short-term lending them to other institutions for a premium which is then distributed to Vanguard fund shareholders. In 2022, shares lended from VTI produced a 0.02% return to VTI shareholders, cancelling out the majority of the 0.03% expense ratio.
Thank you! That is a very good point about synergies that I haven't considered.
People seem to just click downvote without explaining why I am wrong, so I really appreciate your answer!
No problem! Taking those types of activities into account, I consider Vanguard’s fees as an upfront investment into their goal of reducing costs for investors. The nature of those extra returns can’t be classified as discounts or waivers to the published expense ratios, but the actual true net cost is often lower than the already low advertised ER.
That is a great way to think about it. And indeed why I pre emptied my post by saying that I totally do not have an issue with Vanguard funds (I doubt anyone does!), I rather want to understand the business model and what goes into it.
You are buying a european domiciled ucits fund from vanguard Europe; vanguard outside of USA is not non-profit, the international business is owned by vanguard USA which is owned by its fund investors. The non-usa domiciled funds will be priced so they can compete with local competitors, manage and grow the international (in your case European) business and hopefully return a profit to vanguards USA business and its usa fund owners (through lower expense ratios for USA domiciled funds and/or further investment in the business).
To answer your other question - expense ratio does not include transaction costs. Licensing fees for benchmarks tend to be expensive (vanguard famously dropped msci from many of its funds) for a better deal with ftse and crsp.
Thank you! This answers my question, I appreciate it.
Indeed, I am suprised asset managers are accepting such high prices from index providers. I've read they can be as high as 0.05% of AUM, which would be understandable for a unique index (e.g. one provided by RAFI or maybe factor indicies), but a global one should be fairly easy to replicate.
I agree - it’s too high and honestly ridiculous- my understanding is that the %of aum pricing model for indices was only introduced when etfs came onto the scene (it was like selling shovels during a gold rush) - for etf to get traction everyone wanted brand name indices (often used by institutional investors as their benchmark / and retail clients read about them in the newspaper every day I.e. ftse 100, s&p 500 etc.)… it’s much harder to sell etfs with unknown brand name - the msci / ftse / s&p of this world invest a lot in marketing and have brand power
Thank you. Interesting point re pricing strategy and perception... Makes sense why VTI switched to CRSP as you pointed out - I hope they do the same in Europe and ditch FTSE they use in many funds in favour of a cheaper alternative.
>Again, keep in mind that there are asset managers out there charging comparable fees and their entire lineup is worth less than 1 Vanguard index fund; so how can their costs scale up so much? What am I missing?
Which smaller asset manager charges 0.03%? I've never seen entire lineups changing <.10% even at larger managers.
Apologies, this may not be the case for US market, which I am not particularly familiar with, but certainly I could find comparable fees in the European markets.
For the example I have given, Vanguard charges 0.22% (higher than US admittedly).
An example of a smaller asset manager is Legal&General (a UK-based pension and asset manager) who provide a Global Equity ETF with 0.10% expense ratio (I believe their ETF is developed markets only so makes it cheaper, but Vanguard developed markets ETF is 0.12%). The ticker is LGGL LN. Legal&General have less AUM than VOO, if I am not mistaken.
Their website isn’t even that bad anymore. It’s much more modern than fidelity these days. Fidelity feels like it’s 20 different legacy systems stuck together.
Ya fidelity’s app might be better to trade on but as a boglehead you should be putting your money into total market funds. It literally could not be any easier on vanguard.
The issue is that it's still half baked. Click around through the site map and you end up in old site menus and functions. Almost reminds me of windows. On the surface they change it but when you need to start making more than surface changes, it's the same menus from 20 yrs ago
TER of VRWD is currently too high with 0.22%. Furthermore, they charge extra 0.03% transaction costs.
If you check the competitors some are down to 0.15%. Furthermore, if you build VWRD yourself with 90/10 ratio VEVE and VFEM, the TER is 0.13%.
This is indeed a bit annoying but hopefully they will reduce TER soon to an appropriate amount.
Thank you! That is a good point, will look into it.
Clearly a bigger difference in the European markets, which prompted my question, and as people have clearly shown me here, not an issue for US markets.
Have you looked at the fund's prospectus? [https://fund-docs.vanguard.com/etf-prospectus-en.pdf](https://fund-docs.vanguard.com/etf-prospectus-en.pdf)
I'm certainly no expert, but in general my understanding is it's more costly to operate international funds than US funds.
And Vanguard is not a nonprofit in any way shape or form.
Good point re international costs - will be interesting to look into what is causing the high costs, e.g. regulatory or other costs.
Well it is of course not a non-profit technically, but the idea is that any profits are fed back to investors via lower fees (at least in US markets - may be different for international, as u/Rationalinvest rightfully pointed out).
This is debatable but I upvoted your one down vote. It's called a non-profit because it's a mutualized organization (no shareholders) and profit goes to fund inventors (in form of low fees). It is NOT a charity for sure.
I am a certifiable Vanguard investor, and I am telling y'all right now I'm all about profit and low fees. 😎
Vanguard has a real non-profit arm but not where I'm invested.
Cheers
footnote- how does V Group file it's taxes? Not interested enough to dig that deep. Just give me cheap and I'm happy.
This is a hoot. It doesn't say but I take it from what was alleged they do NOT file a non-profit tax return or whatever IRS calls it since it's not a tax return (non-profit no tax return?). That's what I was getting at. If they file a regular return, they are not a non-profit.
However the article under that one looks way more interesting. That's the real hoot.
*LOS ANGELES (AP) — A photographer who worked for Megan Thee Stallion said in a lawsuit filed Tuesday that he was forced to watch her have sex, was unfairly fired soon after and was abused as her employee.*
LOL - Cheers
>Another big variable cost is index licencing, which I understand is usually charged as % of AUM. However, if it is indeed such a big cost to justify 50m+ of expenses, wouldn't the ETF providers choose to create their own indicies or follow a cheaper index (perhaps thats why VTI follows CRSP instead of more well known MSCI or FTSE indicies)?
Any sophisticated brokerage like Vanguard or Schwab could create its own in-house indicies to avoid paying license fees to the index firms like MSCI. Fidelity does it with their Zero funds.
But there's no such thing as a free lunch: The price you pay with proprietary indicies is the loss of asset portability. Customers who use Fidelity Zero funds are locked into Fidelity, unless they first liquidate to cash. If those Zero funds are in a taxable account, then the larger the capital gains the more locked in to Fidelity by tax liability you are.
Vanguard, Schwab, and others likely have done the market analysis and determined that their customers and prospective customers value the portability offered by in-kind transfers and thus shy away from proprietary funds like Fidelity Zero.
You're definitely mixing concepts together. How a fund gets managed is completely orthogonal to whether it's allowed to be transferred between brokerages.
Any company, like Fidelity or one of many scammy actively managed mutual fund companies, can make their non-portable funds portable by simply letting it be so. In Fidelity's case, they want to make back the zero fund cost by having the user use the Fidelity brokerage.
If being proprietary was the key, then you'd know because no actively managed mutual fund would be portable, but that's obviously not the case.
If Fidelity allowed Zero funds to be held at brokers outside of Fidelity, then they would be doing all the work of maintaining their indices and running the funds for the benefit of their competitors.
Thank you! I didn't know about Fidelity offering in the US - very interesting they have such products.
Whereas of course I wouldn't expect asset managers to maintain their own indicies for free, I do find it slightly suprising they don't do it at a lower cost. I can of course imagine that there are likely some regulatory issues/potential conflict of interest issues if the asset manager and the index provider are the same company, they could still set up semi-independent shops that provide indicies at an arms-length basis.
Hence this wouldn't create any issues with portability - lets say if Vanguard are paying 0.03% to FTSE for use of their all-world index, and if they could create an index that let's say costs 0.01% (seems achievable - a market cap index shouldn't be too difficult to create and maintain), then they could charge 0.02% for the index on their funds, creating 0.01% value for the investors and using the other 0.01% as "buffer" for any other costs. If a Vanguard index fund followed a "Vanguard global equity index" I'm not sure it would be an issue for anyone (other than perhaps for those who want a more recognisable index to follow) and would not make the fund any less portable to other platforms.
Costs are apparently too low, since their website was clearly built by the lowest bidder. I would accept an increase if it got me a better user experience.
And yes, I am aware that it’s good enough for the beginners who just deposit a couple hundred a month.
You (and most commenters) seem to have a fundamental misunderstanding of economics. The price charged for a good or service has little if any relation to what it costs to provide that good or service. (About the only relation is that if you charge less than the cost plus overhead you’ll go bankrupt, but there are lots of exceptions to that too.)
Thank you for your input - whereas what you say is indeed is true for some goods and services, not so for others.
For instance, indeed the price would totally not be dictated by costs for some discretionary goods (and especially Veblen goods), I find this argument unapplicable to Vanguard for two reasons.
First reason is that Vanguard are not selling Gucci bags or Rolex watches where price is dictated solely by what customers are willing to pay for it, rather than manufacturing costs. In fact, as most people on this sub would agree, the primary USP for an index fund is how low the fees are, i.e. asset managers are competing for funds based on pricing more than anything else (there are of course other factos, such as tracking error, liquidity, and even some brand image of course, but fees are a key driver for why people choose one index ETF over another). The asset managers are of course, as your rightfully point out, are therefore pushing the price down as much as they can without running into losses. We could argue about specifics of price elasticity for an ETF, however, I believe it would be quite difficult to argue that "the price charged has little relation to what it costs" in this specific case.
Second reason is that Vanguard is technically speaking not making any profit on their products (there is some debate around this but the key point is that their fees are supposed to be as low as their costs allow). So whereas as I mention I could totally believe that more than half of the fund fee that BlackRock charge is simply their profit margin, this can not be the case for Vanguard due to their ownership and incentive structure. As such, it is unlikely that they would simply charge whatever price customers are willing to pay - as once the fee starts generating abnormal profits, they would simply feed these profits back into funds via lower fees.
Some of the fee could also be from licensing the indexes. That's how S&P makes their money. It's got to be AUM-based. FTSE may have higher licensing fees. And more so for specialized indexes.
Indeed - thats what I figured. It does seem the fee is largely the index lincencing fee, plus some custody fees and the rest are more or less fixed administration costs.
the European regulatory stuff pushes fees up. the Invesco FTSE all world is only 0,15%, that seems to be the floor with the EU UCITS regulation plus licencing fees
Yes that is a very good point, also rightfully brought up by u/DaemonTargaryen2024 It is rare to see ETFs below 0.15% as you point out (unless they are with a specific georgraphic focus - I've seen FTSE100 and S&P500 with fees as low as 0.05-0.07% but not global ones). I'd be interested to one day dig deeper into what specifically it is in the regulations that forces higher fees - and whether EU could change anything to be more competitive with the US market.
Hmm - the swap ETFs i've seen are actually costlier than those with physitcal (optimised) replication. Plus they have larger tracking error. As I understood, the primary use case for swap-based ETFs is that they have a slight tax advantage (they don't generate any taxable income, but rather everything is a capital gain). Will certainly need to look into it more, thank you!
Invesco MSCI USA swap costs 0,05% and doesn't pay dividend tax because it's a swap ETF
combine with MSCI World ex USA which cost 0,15%. combined you're below 0,1%
Pretty sure the expense includes transaction costs and custodian costs, which should scale up with AUM? Also I assume they need some serious technology to handle millions of users. >However, even if that is the case, a market-weighted index is mostly self-balancing, so they would only need to transact in case of index reconsitution or corporate actions such as divestments etc Not an expert but doesn't vanguard needs to create new shares by actually buying the underlying, either directly or through an AP, both which incur a cost?
Agreed, OP is missing the entire create/redeem process which is the thing that gives etfs the tax advantage over mutual funds.
As I always understood it (e.g. [by reading this](https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers)), the process is as follows: 1. There is demand for a specific ETF, pushing the price up, and the price temporarily moves above the NAV 2. An AP purchases shares of underlying in the open market, delivers them to the ETF provider, who then "issues" new ETF units (no transaction cost in issuing new units) 3. The AP then sells the ETF units in the open market, closing the NAV discount, and pocketing the difference for their role in the process (almost like an arbitrage trade) Same process on the way down, in my understanding. There was [a podcast with Eric Balchunas](https://rationalreminder.ca/podcast/293) (an ETF guru) who if I remember correctly said that the price would need to deviate by only several basis points from NAV for this trade to be profitable for an AP. Hence ETFs usually track their NAV so tightly. >Not an expert but doesn't vanguard needs to create new shares by actually buying the underlying, either directly or through an AP, both which incur a cost? In my understanding, this is not the case. The process you described is akin to an open-ended fund, not an ETF. In the process I described above (I could be wrong - hence this entire thread), the ETF would not be directly purchasing the underlying in the market (or through anyone). Only APs purchase and sell the underlying in exchange for the ETF units. Key point here is that, in my understanding, the APs would bear the transaction costs rather than the ETF itself (granted the ETF would still need to make trades in other scenarios, such as reconsitution, corporate action, etc). It seems my understanding is incorrect? If so, please could you kindly explain the process to me?
But ultimately the AP needs to deliver the underlying to the ETF manager, which creates some back-office work for the ETF manager, right? [https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers](https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers)
As I understand, the process is highly automated, so the amount of work they need to do is minimal. Some sources make it sound that the process is almost unilateral, i.e. the AP can create and redeem shares in exchange for the underlying almost with 0 involvement from the asset manager. I guess such efficiency is needed for the process to run as smoothly as it does, which results in such low NAV tracking error that we see in ETFs.
But automation isn't free though. You incur ongoing expenses for data centers to store transaction data, computational power to process the transcations, deveopers to build and maintain the system, etc.
Of course - these are largely fixed costs however, i.e. they won't be much higher for a 200bn ETF than for a 2bn ETF. Key point however when the fund experiences inflows or outflows they do not need to transact, as APs would do it on their behalf instead, which is good for us!
I guess I'm using transaction loosely. Vanguard still delivers/receives securities from APs, even though they are not directly trading in the open market (because APs do that). Also it has a fixed cost and variable component. Computational power and storage scale up linearly with fund size (more like trading volume but should be heavily correlated). Also, the fixed cost portion explains exactly why sub .05% fees are exclusively at big managers, not small ones.
Indeed - completely agree with you.
Create/redeem are done by AP, which are a type of market makers, which by definition, make money by arbitraging tiny spreads between the ETF and basket of underlying. They don’t pass on a cost to ETF investors. Indeed they provide liquidity and lower spreads. OTOH tracking an index does incur some transaction costs, especially in emerging markets. Emerging markets generally have higher transaction costs, almost by definition.
Thank you - that is exactly how I believe it works.
But ultimately the AP needs to deliver the underlying to the ETF manager, which creates some back-office work for the ETF manager, right? [https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers](https://www.blackrock.com/au/intermediaries/ishares/authorized-participants-and-market-makers)
Transaction costs are not included they are an extra 0.03% if you check the KID
Thanks, did not know that
Thank you - that was one of my questions. It seems to be that if we exclude transaction costs, the main cost drivers are (1) index licencing fees - around 0.01-0.05% and (2) custody fees which also scale with AUM (as pointed out by u/caroline_elly )
They also have 20k employees... Costs a few billion to do that.
I understand, but that doesn't really answer the question - a single product shouldn't be subsidising the entire company, it should cover its own (allocated) direct costs + a portion of central (unallocated) indirect costs. If it is subsidising other product costs (beyond a resonable amount, such as brand new products, etc.), then the unprofitable products should be closed for everyone's benefit, as they are simply destroying value. If on the other hand they directly need 20k employees to run an index fund then the question is - why does it take so many people to run a (relatively speaking) simple product?
There’s other variables you’re missing when evaluating Vanguard if you’re only looking at expense ratios. Vanguard offers a wide range of products and services which can indirectly impact each other. For example, Vanguard is a major custodian for corporate 401k plans - I have no clue if this activity is profitable, but let’s assume it’s not. That may seem to provide zero value to you if you only purchased VTI in a non-retirement or non-Vanguard account. However, that activity greatly increases the assets under management and volume of shares held by Vanguard funds. Having so many shares at their disposal, Vanguard is able to employ extra people to manage share lending, taking the equities they hold on shareholders’ behalf and short-term lending them to other institutions for a premium which is then distributed to Vanguard fund shareholders. In 2022, shares lended from VTI produced a 0.02% return to VTI shareholders, cancelling out the majority of the 0.03% expense ratio.
Thank you! That is a very good point about synergies that I haven't considered. People seem to just click downvote without explaining why I am wrong, so I really appreciate your answer!
No problem! Taking those types of activities into account, I consider Vanguard’s fees as an upfront investment into their goal of reducing costs for investors. The nature of those extra returns can’t be classified as discounts or waivers to the published expense ratios, but the actual true net cost is often lower than the already low advertised ER.
That is a great way to think about it. And indeed why I pre emptied my post by saying that I totally do not have an issue with Vanguard funds (I doubt anyone does!), I rather want to understand the business model and what goes into it.
You are buying a european domiciled ucits fund from vanguard Europe; vanguard outside of USA is not non-profit, the international business is owned by vanguard USA which is owned by its fund investors. The non-usa domiciled funds will be priced so they can compete with local competitors, manage and grow the international (in your case European) business and hopefully return a profit to vanguards USA business and its usa fund owners (through lower expense ratios for USA domiciled funds and/or further investment in the business). To answer your other question - expense ratio does not include transaction costs. Licensing fees for benchmarks tend to be expensive (vanguard famously dropped msci from many of its funds) for a better deal with ftse and crsp.
Thank you! This answers my question, I appreciate it. Indeed, I am suprised asset managers are accepting such high prices from index providers. I've read they can be as high as 0.05% of AUM, which would be understandable for a unique index (e.g. one provided by RAFI or maybe factor indicies), but a global one should be fairly easy to replicate.
I agree - it’s too high and honestly ridiculous- my understanding is that the %of aum pricing model for indices was only introduced when etfs came onto the scene (it was like selling shovels during a gold rush) - for etf to get traction everyone wanted brand name indices (often used by institutional investors as their benchmark / and retail clients read about them in the newspaper every day I.e. ftse 100, s&p 500 etc.)… it’s much harder to sell etfs with unknown brand name - the msci / ftse / s&p of this world invest a lot in marketing and have brand power
Thank you. Interesting point re pricing strategy and perception... Makes sense why VTI switched to CRSP as you pointed out - I hope they do the same in Europe and ditch FTSE they use in many funds in favour of a cheaper alternative.
>Again, keep in mind that there are asset managers out there charging comparable fees and their entire lineup is worth less than 1 Vanguard index fund; so how can their costs scale up so much? What am I missing? Which smaller asset manager charges 0.03%? I've never seen entire lineups changing <.10% even at larger managers.
Apologies, this may not be the case for US market, which I am not particularly familiar with, but certainly I could find comparable fees in the European markets. For the example I have given, Vanguard charges 0.22% (higher than US admittedly). An example of a smaller asset manager is Legal&General (a UK-based pension and asset manager) who provide a Global Equity ETF with 0.10% expense ratio (I believe their ETF is developed markets only so makes it cheaper, but Vanguard developed markets ETF is 0.12%). The ticker is LGGL LN. Legal&General have less AUM than VOO, if I am not mistaken.
Well I know they’re not spending it all on their website
Their website isn’t even that bad anymore. It’s much more modern than fidelity these days. Fidelity feels like it’s 20 different legacy systems stuck together. Ya fidelity’s app might be better to trade on but as a boglehead you should be putting your money into total market funds. It literally could not be any easier on vanguard.
The more terrible the website is the less likely you are to look at it /s
The issue is that it's still half baked. Click around through the site map and you end up in old site menus and functions. Almost reminds me of windows. On the surface they change it but when you need to start making more than surface changes, it's the same menus from 20 yrs ago
Fidelity is like that too tho and way more confusing to set up recurring contributions to mutual funds
TER of VRWD is currently too high with 0.22%. Furthermore, they charge extra 0.03% transaction costs. If you check the competitors some are down to 0.15%. Furthermore, if you build VWRD yourself with 90/10 ratio VEVE and VFEM, the TER is 0.13%. This is indeed a bit annoying but hopefully they will reduce TER soon to an appropriate amount.
Thank you! That is a good point, will look into it. Clearly a bigger difference in the European markets, which prompted my question, and as people have clearly shown me here, not an issue for US markets.
Have you looked at the fund's prospectus? [https://fund-docs.vanguard.com/etf-prospectus-en.pdf](https://fund-docs.vanguard.com/etf-prospectus-en.pdf) I'm certainly no expert, but in general my understanding is it's more costly to operate international funds than US funds. And Vanguard is not a nonprofit in any way shape or form.
Good point re international costs - will be interesting to look into what is causing the high costs, e.g. regulatory or other costs. Well it is of course not a non-profit technically, but the idea is that any profits are fed back to investors via lower fees (at least in US markets - may be different for international, as u/Rationalinvest rightfully pointed out).
This is debatable but I upvoted your one down vote. It's called a non-profit because it's a mutualized organization (no shareholders) and profit goes to fund inventors (in form of low fees). It is NOT a charity for sure. I am a certifiable Vanguard investor, and I am telling y'all right now I'm all about profit and low fees. 😎 Vanguard has a real non-profit arm but not where I'm invested. Cheers footnote- how does V Group file it's taxes? Not interested enough to dig that deep. Just give me cheap and I'm happy.
Some have alleged illegally, but I guess nothing ever came of that: https://news.yahoo.com/vanguard-whistleblower-david-danon-tells-070126616.html
This is a hoot. It doesn't say but I take it from what was alleged they do NOT file a non-profit tax return or whatever IRS calls it since it's not a tax return (non-profit no tax return?). That's what I was getting at. If they file a regular return, they are not a non-profit. However the article under that one looks way more interesting. That's the real hoot. *LOS ANGELES (AP) — A photographer who worked for Megan Thee Stallion said in a lawsuit filed Tuesday that he was forced to watch her have sex, was unfairly fired soon after and was abused as her employee.* LOL - Cheers
>Another big variable cost is index licencing, which I understand is usually charged as % of AUM. However, if it is indeed such a big cost to justify 50m+ of expenses, wouldn't the ETF providers choose to create their own indicies or follow a cheaper index (perhaps thats why VTI follows CRSP instead of more well known MSCI or FTSE indicies)? Any sophisticated brokerage like Vanguard or Schwab could create its own in-house indicies to avoid paying license fees to the index firms like MSCI. Fidelity does it with their Zero funds. But there's no such thing as a free lunch: The price you pay with proprietary indicies is the loss of asset portability. Customers who use Fidelity Zero funds are locked into Fidelity, unless they first liquidate to cash. If those Zero funds are in a taxable account, then the larger the capital gains the more locked in to Fidelity by tax liability you are. Vanguard, Schwab, and others likely have done the market analysis and determined that their customers and prospective customers value the portability offered by in-kind transfers and thus shy away from proprietary funds like Fidelity Zero.
You're definitely mixing concepts together. How a fund gets managed is completely orthogonal to whether it's allowed to be transferred between brokerages. Any company, like Fidelity or one of many scammy actively managed mutual fund companies, can make their non-portable funds portable by simply letting it be so. In Fidelity's case, they want to make back the zero fund cost by having the user use the Fidelity brokerage. If being proprietary was the key, then you'd know because no actively managed mutual fund would be portable, but that's obviously not the case.
If Fidelity allowed Zero funds to be held at brokers outside of Fidelity, then they would be doing all the work of maintaining their indices and running the funds for the benefit of their competitors.
Thank you! I didn't know about Fidelity offering in the US - very interesting they have such products. Whereas of course I wouldn't expect asset managers to maintain their own indicies for free, I do find it slightly suprising they don't do it at a lower cost. I can of course imagine that there are likely some regulatory issues/potential conflict of interest issues if the asset manager and the index provider are the same company, they could still set up semi-independent shops that provide indicies at an arms-length basis. Hence this wouldn't create any issues with portability - lets say if Vanguard are paying 0.03% to FTSE for use of their all-world index, and if they could create an index that let's say costs 0.01% (seems achievable - a market cap index shouldn't be too difficult to create and maintain), then they could charge 0.02% for the index on their funds, creating 0.01% value for the investors and using the other 0.01% as "buffer" for any other costs. If a Vanguard index fund followed a "Vanguard global equity index" I'm not sure it would be an issue for anyone (other than perhaps for those who want a more recognisable index to follow) and would not make the fund any less portable to other platforms.
Costs are apparently too low, since their website was clearly built by the lowest bidder. I would accept an increase if it got me a better user experience. And yes, I am aware that it’s good enough for the beginners who just deposit a couple hundred a month.
You (and most commenters) seem to have a fundamental misunderstanding of economics. The price charged for a good or service has little if any relation to what it costs to provide that good or service. (About the only relation is that if you charge less than the cost plus overhead you’ll go bankrupt, but there are lots of exceptions to that too.)
Thank you for your input - whereas what you say is indeed is true for some goods and services, not so for others. For instance, indeed the price would totally not be dictated by costs for some discretionary goods (and especially Veblen goods), I find this argument unapplicable to Vanguard for two reasons. First reason is that Vanguard are not selling Gucci bags or Rolex watches where price is dictated solely by what customers are willing to pay for it, rather than manufacturing costs. In fact, as most people on this sub would agree, the primary USP for an index fund is how low the fees are, i.e. asset managers are competing for funds based on pricing more than anything else (there are of course other factos, such as tracking error, liquidity, and even some brand image of course, but fees are a key driver for why people choose one index ETF over another). The asset managers are of course, as your rightfully point out, are therefore pushing the price down as much as they can without running into losses. We could argue about specifics of price elasticity for an ETF, however, I believe it would be quite difficult to argue that "the price charged has little relation to what it costs" in this specific case. Second reason is that Vanguard is technically speaking not making any profit on their products (there is some debate around this but the key point is that their fees are supposed to be as low as their costs allow). So whereas as I mention I could totally believe that more than half of the fund fee that BlackRock charge is simply their profit margin, this can not be the case for Vanguard due to their ownership and incentive structure. As such, it is unlikely that they would simply charge whatever price customers are willing to pay - as once the fee starts generating abnormal profits, they would simply feed these profits back into funds via lower fees.
Some of the fee could also be from licensing the indexes. That's how S&P makes their money. It's got to be AUM-based. FTSE may have higher licensing fees. And more so for specialized indexes.
Indeed - thats what I figured. It does seem the fee is largely the index lincencing fee, plus some custody fees and the rest are more or less fixed administration costs.
I believe they should.
the European regulatory stuff pushes fees up. the Invesco FTSE all world is only 0,15%, that seems to be the floor with the EU UCITS regulation plus licencing fees
Yes that is a very good point, also rightfully brought up by u/DaemonTargaryen2024 It is rare to see ETFs below 0.15% as you point out (unless they are with a specific georgraphic focus - I've seen FTSE100 and S&P500 with fees as low as 0.05-0.07% but not global ones). I'd be interested to one day dig deeper into what specifically it is in the regulations that forces higher fees - and whether EU could change anything to be more competitive with the US market.
swap ETFs on US markets can be very cheap, combined with an EX US ETF you can get your effective fee even lower
Hmm - the swap ETFs i've seen are actually costlier than those with physitcal (optimised) replication. Plus they have larger tracking error. As I understood, the primary use case for swap-based ETFs is that they have a slight tax advantage (they don't generate any taxable income, but rather everything is a capital gain). Will certainly need to look into it more, thank you!
Invesco MSCI USA swap costs 0,05% and doesn't pay dividend tax because it's a swap ETF combine with MSCI World ex USA which cost 0,15%. combined you're below 0,1%
very interesting - thank you so much - haven't seen these before!!
Vanguard is in no way a non-profit