Index funds reduce costs, boost returns, says Vanguard

U.S.-based Vanguard Group, founded in 1975, manages more than $2 trillion in assets and was a pioneer in the introduction of index mutual funds. Vanguard offers a broad array of exchange-traded funds (ETFs), including 11 ETFs on the Toronto Stock Exchange.

Unlike actively managed mutual funds which have highly paid professionals buying and selling shares, index funds and ETFs buy stock indexes. This reduces your fees and adds to your return because they do not need active management. William McNabb, CEO of the Pennsylvania-based firm, spoke to U.S. Today’s John Waggoner. Which is more important for investors: Low fees or indexing?

The most important thing for investors is cost. Indexing is the purest expression of that. For most con- sumer goods, the sense is that the more I pay, the more I get something in addition. In investments, the data do not suggest that. The best predictor of future performance is cost. Funds in the lowest quartile of cost have outperformed consistently over every time period. What else do you think are the biggest problems investors face saving for retirement?

There are two huge challenges. One is access to retirement plans. Many small companies don’t offer them because of the complexity of doing so.

The other challenge is savings rates. For those employees who do have employer plans, the average savings is 9 per cent. If you combine company contribution plus what employees are setting aside, the number needs to be in 12 per cent to 15 per cent range