Vanguard Group has slashed fees across the board, daring competitors with passive offerings — once again — to follow suit. Active managers know the drill and are likely to stand pat on fees, but evaluate whether their funds are still a cost-effective and better alternative to passive.
Staying true to founder Jack Bogle’s catchphrase, “you get what you don’t pay for”, Vanguard this week announced the largest ever fee cut in its history on 168 share classes across 87 funds, including 53 exchange-traded funds. At around a 20 percent cut in fees per share class, the firm said the cuts will save investors around $350 million this year alone.
Although Vanguard’s move is not surprising and is in line with broad-based pressure on managers to lower fees, the sheer size of the cuts has piqued interest.
The impact of the cuts will be different by category. Aniket Ullal, senior v.p. of ETF research and analytics at CFRA, said in a research note this week that Vanguard cut fees on some of its largest funds, such as non-U.S. equity and dividend funds, giving it an opportunity to make further gains. With funds that lag behind competitors, the manager can use its lower cost options to build assets.
Vanguard wants to strengthen areas like U.S.-focused sector ETFs, where it is not the lowest-cost provider, although it is close after the cuts. Fidelity, for example, has 10 similar sector funds with lower fees.
Ullal said that it “will be interesting to see how the other leading ETF issuers respond to Vanguard’s aggressive fee reduction strategy,” and that large peers like BlackRock, State Street Global Advisors and Invesco will be able to sustain such low fees. Others like Capital Group or J.P. Morgan Asset Management will continue to focus on actively managed funds.
Daniel Sotiroff, a senior manager research analyst for Morningstar, said bigger asset managers that offer comparable products, particularly international ETFs, such as the Vanguard FTSE developed markets ETF and Vanguard Total International Stock, may fight back with cuts. “Those both got a three-basis-point cut and are the cheapest options available out there right now,” he said. “It’s going to be very selective, you could very realistically see some response from them. We’re just kind of in a wait-and-see mode at this point.”
A CIO at a large asset manager, who is responsible for multi-asset strategies told Institutional Investor that the news was “par for the course” and that he was “not sure why an announcement like that would seem to be much of a surprise to anyone.”
He added that this does not mean it can be ignored.
“That doesn’t mean we don’t have to think about where our strategies are priced and making sure they offer value to investors and are competitive within the landscape of the industry — and we certainly feel like they are,” he said. “We don’t really see that changing just because of today’s announcement. It doesn’t change the competitive dynamics for us.”
The CIO went on to say that the fee pressure does mean that value propositions need to be strong and firms that do not offer something substantial will suffer as a result. He added that this is not a new theme caused by the announcement per se, but something the industry has faced for some time.
“It is about having flexibility as active managers, you can see in the way that we’ve managed our portfolios over the last five, ten, and twenty years that being dynamic with what’s happening in markets and looking across a broad range of assets for the most attractive income opportunities and implementing that in the portfolio pays off,” he added.
As an example, the recent cycle has been unusual, with rate changes requiring a dynamic reactionary approach to how much fixed income or equity is held within a portfolio. Passive does not offer that.
Sotiroff said the fee reductions at Vanguard, which already offers the lowest cost options in many categories, are timely following customer criticism of the firm’s decision to raise brokerage fees in 2024 and a recent SEC settlement over the firm misleading investors about tax consequences.
“They’re taking a $315 million hit to their revenue this year because of this and it shows that Vanguard is really willing to give up a substantial amount of revenue for the betterment of its clients,” he said. “They’ve been in the news for some not great reasons and made some mistakes, so there is a little part of marketing or goodwill and trying to communicate to clients that they are not just keeping money for their own benefit but will give it back as best they can.”
Salim Ramji, a BlackRock veteran who was appointed as its new CEO last May, said in a statement “There’s a false dichotomy between, do you want great performance or high quality, or do you want low costs,” he said. “At Vanguard, you can get both. This is over $350 million of estimated savings — the largest expense cut in our history. Since 1975, we’ve actually reduced our funds’ expense ratios more than 2000 times.”
