Pretty much everything in life costs money, including financial services. One mutual fund firm — Vanguard, already famous for its relatively low fees — is changing its expense ratios with the aim of returning a total of $1 billion in fees to its customers by 2025. This could impact you if you use Vanguard products or plan to in the future, so read on to get a fuller picture of the changes Vanguard is making — and if it could lead to more money in your account.
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What Action Is Vanguard Taking?
Vanguard announced that it was changing the expense ratio on 18 funds. The total deductions range from 1 basis point to 6 basis points. Some funds did see an increase in expense ratio, ranging from 1 basis point to 50 basis points. A basis point is equal to one one-hundredth of one percent, so a one basis point reduction is equal to a fee reduction of 0.01%. While that may seem like small potatoes, when you’re talking about huge funds, the savings adds up. According to Vanguard’s press release announcing this change, these changes will result in $34.2 million for investors.
The fund seeing the biggest cuts are the Vanguard International High Dividend Yield ETF and the Vanguard International High Dividend Yield Index Admiral Shares, both of which are going down by six basis points. The fund seeing the biggest increase is the Vanguard Alternative Strategies Fund, an increase of 50 basis points. No other fund’s expense ratio is increasing by more than a single basis point. Alternative strategies tend to be more complicated and require more work from fund managers, resulting in generally higher expense ratios.
Why Is Vanguard Making These Changes?
Vanguard, founded by Jack Bogle, is firm that essentially created index investing — creating funds that track stock indexes like the S&P 500 rather than employing a fund manager to make stock picks. Eliminating the need for stock picking allowed Vanguard to set expense ratios very low from the start, and it became synonymous with low-cost, index-focused investing. While other firms have since added index funds and worked to lower costs, Vanguard is sort of like the “OG” of low-cost investing.
In 2019, Vanguard announced it was looking to take even more steps to lower the cost and eliminate the entry barrier to the world of investing, planning to cut fees by a total of $1 billion by 2025. As of February 2022, the firm has cut fees by a total of around $450 million, meaning the plan is to eliminate a further $650 million by 2025.
Why Expense Ratios Matter
Investing isn’t easy, and there are a lot of details that some investors don’t have the time to deal with. One thing that some novice investors don’t account for is the expense ratio their mutual fund investments carry. There are plenty of stories of investors putting money into a fund and being shocked when a decent chunk of their earnings and investment are swallowed up by fees. If you’re investing through a financial advisor or a 401(k) especially, there could be several layers of fees that pile up, leaving many investors wondering if it is even worth it to be in the investing games.
Lower fees such as the ones Vanguard is offering could, in theory, encourage more novice and lower-net-worth investors to become involved in the market, meaning more people can benefit from economic growth rather than just rich people.
The Bottom Line
Vanguard is continuing its mission to cut $1 billion in expense ratio fees by 2025, cutting expense ratios on 18 funds and saving investors more than $32 million. The total saved by fee cuts since 2019 was around $450 million as of February 2022, with a further $650 million to come.
Investing Tips
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