Tue. Jan 18th, 2022

Vanguard fired the latest shot in a fee war at a time when cheap passive investment strategies are flourishing and active executives have come under pressure for their poor performance.

CEO Tim Buckley said Vanguard would cut $ 1 billion of its investment fund fees by 2025 after reducing its costs by $ 140 million last year.

The move points to a further escalation in the battle between big asset managers that has lowered fund fees over the past two decades.

Vanguard in Pennsylvania has gained a reputation as one of the investment industry’s toughest price competitors by continually reducing its fund fees since its inception in 1975, a strategy that has helped it recruit more than 30 million clients. Investors allocated $ 299.4 billion in new cash to Vanguard’s funds last year, 61 percent higher than the $ 186 billion net inflow recorded in 2020.

Vanguard’s international arm recorded $ 39 billion in net outflows in 2021 after withdrawing from managing several low-fee mandates on behalf of large institutional clients, part of a shift to focus more on financial advisors and retail investors in non-US markets .

The group was also a pioneer in passive investing, with funds tracking baskets of assets rather than paying expensive fund managers to bet on winners and losers.

Competitors including BlackRock, State Street, Charles Schwab, UBS and Amundi fought back in the price war.

BlackRock this week cut fees on two exchange-traded funds with combined assets of $ 34.6 billion thereafter shear costs on ETFs with $ 14 billion in assets In October. The New York-based asset manager will report its latest financial results on Friday.

Line graph of percentage indicating fierce competition lowers mutual fund fees

Buckley said the fee reductions would be spread across Vanguard’s active and passive funds. The decision comes at a time when active managers are facing increasing scrutiny over their fees and performance. Last year, only a quarter of the active fund managers investing in large U.S.-listed companies beat Wall Street’s S&P 500 stock benchmark.

The average spending ratio for actively managed U.S. equity funds – the share of a fund’s assets that goes to management fees and other operating expenses – was 0.71 percent in 2020 compared to 0.06 percent for index equity funds, according to the Investment Company Institute. a global trading body.

The huge shift by investors to index-following ETFs over the past decade – total assets reached $ 10.3 billion by the end of 2021 – has helped Vanguard and its closest rival BlackRock build increasingly dominant positions as the two largest players in global asset management industry.

Investors poured $ 347 billion into Vanguard’s exchange-traded fund arm last year, securing more than a quarter of the ETF industry’s record annual return of $ 1.3 billion in 2021. Six of the 10 most popular ETFs bought by investors last year belonged to Vanguard.

This helped push the group’s assets under management above the $ 8tn notch for the first time to $ 8.4tn at the end of December.

Buckley said ETF demand was “booming” among U.S. financial advisers and retail investors. “ETFs now offer more choices, more flexibility with tax loss harvests and now also at a lower cost than mutual funds,” Buckley said.

Jack BogleVanguard’s founder, opposed ETFs because he believed it would encourage investors to trade more frequently, which would result in higher costs and lower returns. But these concerns were not reflected in customer behavior, Buckley said.

“Only a quarter of Vanguard’s customers trade in any given year. “Most of the activity is the result of portfolio rebalancing that affects a fifth of the clients’ assets on average,” he said.

Record flows for ETFs have encouraged an extraordinary spread of new products. Asset executives have created dozens of niche-themed ETFs and U.S. regulators are facing increasing calls for the launch of Bitcoin ETFs.

“Does an ETF belong in a long-term portfolio or can it disappear in 10 years? Bitcoin ETFs may be good for a discussion at a cocktail party, but are cryptocurrencies an asset class with an intrinsic value? Investors must adhere to basic principles, ”said Buckley.

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