Low cost, high value
Vanguard continues to set the benchmark for investment choice and fees, writes Susan Hely
It is no wonder that Vanguard wins the award this year for Best ETF Provider. It is the greatest disruptor of the investment world. In the 1970s, founder Jack Bogle took on Wall Street’s high-fee, high-turnover active investment managers by offering low-fee, low-turnover index funds. The $5.9 trillion group hasn’t stopped disrupting the poor practices of the investment world and changing the way people invest.
Investors in Australia benefited again in November 2017 when Vanguard launched four diversified ETFs with different levels of risk. While diversified funds aren’t new – there are hundreds of unlisted multi-sector managed funds – Vanguard’s four are the first for the listed ETF landscape in Australia. What is revolutionary is the cost: a low 0.27%pa. This is at least a quarter of the average fee for a multi-sector managed fund, which Morningstar says is 1.09% for conservative, 1.14% for balanced, 1.41% for growth and 1.31% for high growth.
This means that $100,000 invested in a diversified balanced fund earning 7%pa before fees will turn into $191,468 over 10 years with a fee of 0.27% but only $175,406 with a 1.14% fee. In a low-return investment world, costs matter in helping people achieve their goals.
Investors can tap into Vanguard’s already established diversified unlisted index funds, with collective assets of more than $7 billion. Each fund holds different levels of assets – Australian and international shares, small companies, emerging markets, cash, and local and international fixed interest.
“They are terrific products for all investors, particularly for self-managed super funds as they offer diversification when SMSFs are heavily concen- trated in Australian equities and cash,” says Daniel Reyes, the Melbourne-based head of investments for Asia-Pacific at Vanguard. Investors benefit from Vanguard’s investment experts continuously assessing the portfolios’ exposure and periodically rebalancing them.
Vanguard is passionate about delivering the lowest-cost and highest-value investments. “We are constantly balancing the two,” says Reyes, who describes working at Vanguard as “really rewarding” because it is always thinking about what is best for the client.
As Vanguard’s assets grow, it passes on the economies of scale by lowering fees. In 1975 the average expense ratio for Vanguard funds was 0.89%; now it is 0.12%. “We really try to get people to focus on costs more than everyone else,” says Reyes.
Vanguard offers 22 funds in Australia and six ETFs have done well this year (see pages 68-72). “The Australian ETF market is maturing but it is by no means mature yet,” says Reyes. He would like to see Australians pay a lot more attention to ETFs and wants them to keep the bulk of their investments in low-cost, diversified ETFs. There is a proliferation of new ETFs that follow a structured index, that aren’t diversified and can have high fees, just like managed funds. “You really do need to understand the underlying nature of the ETF landscape,” he says. “Do your due diligence and be careful. If you don’t understand it, walk away.”
Vanguard is launching three global quantitative active ETFs in coming months which Reyes says can be beneficial for investors to have in their “toolkit”. The fees (0.45%) will be a third of those for the typical actively managed fund.