Hot Tip: Buy Vanguard*

*If only the low-cost fund giant were publicly traded. Meanwhile, here’s how the Vanguardians of the galaxy make out.

Jack Bogle

Photographer: Peter Foley/Bloomberg via Getty Images

"The idea of index fund investing is kind of taking over the world," Vanguard Group founder Jack Bogle said in a recent company webcast.

He's kind of right. The five largest funds in the world are all passively managed, and four of them, with close to $1 trillion in combined assets, are managed by Vanguard. 1 The fifth and smallest one is the SPDR S&P 500 ETF Trust, an exchange-traded fund that has more than $186 billion in assets.  The company, famous for its low-cost offerings, is expanding internationally, and nearly one of every 10 dollars of its $3.5 trillion in assets comes from outside the U.S. 

In the U.S., Vanguard has taken in about $1 billion a day over the past 18 months, and almost one of every two dollars invested in a mutual fund or exchange-traded fund over the past three years went into a Vanguard product, spokesman John Woerth said.

Now the competition is intensifying. On June 28, Fidelity Investments cut fees for 27 of its index funds and ETFs to get more of the money that's flowing into passive strategies. 2 Fidelity's fee cuts will save current investors some $20 million annually and lower the average expense ratio for the group's 27 index mutual and exchange-traded funds to 0.102 percentage point, from 0.116 percentage point, Fidelity said in a statement. In an e-mail exchange unrelated to the cuts, Vanguard spokesman John Woerth noted that "clients are paying $225 million less for investing at Vanguard thanks to the more than 200 fund/ETF expense ratio reductions that we announced for fiscal year 2015." 

If Vanguard were a publicly traded stock, investors would be clamoring to buy it. But, as the company website puts it, "Vanguard is built differently. You own the funds. The funds own Vanguard, which makes you a client-owner."

Vanguard's Partnership Plan, a profit-sharing program to reward employees, is a "dividend," or bonus, based largely on the total cost savings the company provides investors. Average expense ratios on Vanguard funds are compared with average ratios on rival funds, and the difference is multiplied by total assets under management. The dividend has compounded far faster since the plan was launched—54 times—than the 24 times for a share of an S&P 500 index fund, noted Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter, as shown below.

SW-distribution-chart
Source: The Independent Adviser for Vanguard Investors

Woerth said that since Vanguard is a mutual company and has no stock, comparing it to the broad market doesn't make sense. Partnership Plan earnings are based on "relative fund performance, fund cost efficiency, and business results over a three-year period," he said. "The payout for crew members [Vanguard's term for rank-and-file workers] is based on level and tenure." Woerth declined to say what the payout formula was for senior executives.

What the plan numbers do show: You can make good money by providing low-cost options for investors.

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