1 00:00:11,960 --> 00:00:22,120 Speaker 1: You know what I say, where they are fun fees 2 00:00:22,160 --> 00:00:25,599 Speaker 1: going to zero? The trend for ETF prices has been 3 00:00:25,760 --> 00:00:30,360 Speaker 1: lower fees. Now, after a decade of falling prices, those 4 00:00:30,440 --> 00:00:34,040 Speaker 1: fees are approaching zero. Let's bring in an expert to 5 00:00:34,040 --> 00:00:38,479 Speaker 1: help us unpack this. Eric Balchunis's senior ETF analyst at 6 00:00:38,479 --> 00:00:43,680 Speaker 1: Bloomberg Intelligence who writes about funds and ETFs for years. Eric, 7 00:00:43,960 --> 00:00:48,680 Speaker 1: what's going on here with fees? Are they going to zero? Well? 8 00:00:48,680 --> 00:00:50,600 Speaker 2: They have been for a while. There's already a couple 9 00:00:50,720 --> 00:00:54,840 Speaker 2: zero fee ETFs out there. They are from companies that 10 00:00:54,840 --> 00:00:57,120 Speaker 2: aren't as popular as a Schwab or a State Street. 11 00:00:57,640 --> 00:01:00,640 Speaker 2: So I think once you get below five basis points, 12 00:01:00,920 --> 00:01:03,120 Speaker 2: you get to this realm of like super dirt cheap 13 00:01:03,560 --> 00:01:05,920 Speaker 2: where people don't really care are you three or four? 14 00:01:06,160 --> 00:01:09,360 Speaker 2: Are you two or three? You know, it's all almost 15 00:01:09,480 --> 00:01:10,640 Speaker 2: free basically. 16 00:01:10,280 --> 00:01:13,960 Speaker 1: And for people who don't talk in basis points, one 17 00:01:14,040 --> 00:01:17,520 Speaker 1: percent is one hundred basis points, so we're talking about 18 00:01:17,640 --> 00:01:21,760 Speaker 1: three basis points is three percent of one percent. 19 00:01:21,880 --> 00:01:24,080 Speaker 2: Yeah, So if you put ten thousand dollars into the 20 00:01:24,120 --> 00:01:26,800 Speaker 2: three basis point ETF, it'll be three bucks a year. 21 00:01:27,600 --> 00:01:29,920 Speaker 2: That's crazy, It is crazy. It's a beautiful thing. 22 00:01:29,959 --> 00:01:30,319 Speaker 1: Free. 23 00:01:30,400 --> 00:01:33,399 Speaker 2: Yeah, it is. I call it the great cost migration. 24 00:01:33,880 --> 00:01:35,800 Speaker 2: I call it the fee wars. This is why I 25 00:01:35,840 --> 00:01:38,480 Speaker 2: call the ETF industry the terrodome, because it is brutal. 26 00:01:38,520 --> 00:01:41,360 Speaker 2: If you're an issuer. Everybody's cutting fees all the time. 27 00:01:41,720 --> 00:01:44,840 Speaker 2: But the thing is it works. Cutting fees almost is 28 00:01:44,880 --> 00:01:47,160 Speaker 2: like batting a thousand. If you do that, the flows 29 00:01:47,200 --> 00:01:47,480 Speaker 2: will come. 30 00:01:47,600 --> 00:01:50,800 Speaker 1: So let's put a little history in place. Back in 31 00:01:50,840 --> 00:01:54,720 Speaker 1: twenty sixteen, you wrote a column titled the Vanguard Effect, 32 00:01:54,800 --> 00:01:58,480 Speaker 1: and the takeaway was the fee pressure the Vanguard group 33 00:01:58,600 --> 00:02:03,360 Speaker 1: was putting on Wall Street was saving investors a trillion dollars. Explain. 34 00:02:03,960 --> 00:02:06,760 Speaker 2: Yeah, So if you say all the money that went 35 00:02:06,800 --> 00:02:10,200 Speaker 2: to Vanguard, if it were if Vanguard didn't exist, right, 36 00:02:11,040 --> 00:02:12,280 Speaker 2: a lot of that money is going to be in 37 00:02:12,320 --> 00:02:14,519 Speaker 2: mutual funds which have an asset weighted average fee of 38 00:02:14,520 --> 00:02:17,440 Speaker 2: about sixty five basis points on an average fee, they're 39 00:02:17,480 --> 00:02:19,760 Speaker 2: over one percent. But I like to asset weight it 40 00:02:19,800 --> 00:02:21,720 Speaker 2: to be fair. That just basically says where are most 41 00:02:21,720 --> 00:02:24,280 Speaker 2: of the assets? So sixty six. So if that money 42 00:02:24,320 --> 00:02:28,440 Speaker 2: were in a average Vanguard fund that charges Vanguard's asset 43 00:02:28,480 --> 00:02:31,519 Speaker 2: weighted averages nine basis points. So that's a huge saving. 44 00:02:31,560 --> 00:02:34,160 Speaker 2: So that money moving over there, if it weren't in Vanguard, 45 00:02:34,360 --> 00:02:37,720 Speaker 2: we'll be paying sixty six instead of nine. Then Vanguard 46 00:02:37,760 --> 00:02:40,440 Speaker 2: only has half of the passive assets. The other half 47 00:02:40,480 --> 00:02:43,960 Speaker 2: are people who copy them, so Lack Rocky, State Street, Schwab, 48 00:02:44,639 --> 00:02:47,520 Speaker 2: even JP, Morgan and Goldman now have Vanguard ESK Infidelity. 49 00:02:47,600 --> 00:02:50,040 Speaker 2: That was the ultimate sort of surrender because Fidelity has 50 00:02:50,040 --> 00:02:52,919 Speaker 2: been the active manager. But Fidelity has cheaper index funds 51 00:02:52,919 --> 00:02:55,320 Speaker 2: than Vanguard now and they advertise it. So it's amazing. 52 00:02:55,360 --> 00:02:57,760 Speaker 2: So half of the other half I kind of credit 53 00:02:57,919 --> 00:03:00,320 Speaker 2: to Bogel or Vanguard. So if you add all that up, 54 00:03:00,320 --> 00:03:02,200 Speaker 2: you're looking at a trillion dollars total. But that number 55 00:03:02,240 --> 00:03:04,119 Speaker 2: grows by about one hundred and fifty billion a year, 56 00:03:04,480 --> 00:03:07,320 Speaker 2: and that number grows every year. So in the course 57 00:03:07,320 --> 00:03:09,040 Speaker 2: of the next decade or two, we're gonna look at 58 00:03:09,040 --> 00:03:11,640 Speaker 2: four or five trillion in savings just from what Bogul 59 00:03:11,639 --> 00:03:12,240 Speaker 2: and Vanguard did. 60 00:03:12,320 --> 00:03:16,400 Speaker 1: That's unbelievable. And let's flesh this out. When Vanguard launched 61 00:03:16,440 --> 00:03:20,200 Speaker 1: in nineteen seventy four, mutual fund fees were what two 62 00:03:20,240 --> 00:03:23,079 Speaker 1: percent one point eighty six some crazy number like that. 63 00:03:23,600 --> 00:03:27,320 Speaker 1: Imagine that was it. There was hardly any competition. The 64 00:03:27,400 --> 00:03:30,520 Speaker 1: fees were what they were. This has really been half 65 00:03:30,560 --> 00:03:32,400 Speaker 1: a century of feet pressure. 66 00:03:32,720 --> 00:03:35,840 Speaker 2: Yeah, So when I talk about how investors respond to 67 00:03:35,840 --> 00:03:39,040 Speaker 2: lower fees, it happened with Vanguard two. Vanguard's first index 68 00:03:39,080 --> 00:03:41,360 Speaker 2: fund was priced at sixty six basis points, right around 69 00:03:41,360 --> 00:03:44,160 Speaker 2: what mutual funds were, or the cheaper side, And over 70 00:03:44,280 --> 00:03:46,280 Speaker 2: time no one cared at first because that was still 71 00:03:46,360 --> 00:03:48,680 Speaker 2: kind of pricey. But over time they kept cutting the 72 00:03:48,720 --> 00:03:50,840 Speaker 2: fee because of the way their structure is. So when 73 00:03:50,880 --> 00:03:52,840 Speaker 2: they got into like the two thousands, they're now at 74 00:03:52,920 --> 00:03:56,280 Speaker 2: like fourteen twelve basis points really cheap. Then they hit 75 00:03:56,280 --> 00:03:58,320 Speaker 2: two thousand and eight twenty ten, they go under ten. 76 00:03:59,040 --> 00:04:02,440 Speaker 2: Once you get under ten and you're in like irresistible area, 77 00:04:03,160 --> 00:04:05,560 Speaker 2: people go gaga for something that's got the single digit 78 00:04:05,600 --> 00:04:08,560 Speaker 2: basis point fee. And why not. There's been major studies 79 00:04:08,600 --> 00:04:10,960 Speaker 2: that show if you pay like a couple basis points 80 00:04:11,320 --> 00:04:14,280 Speaker 2: over thirty forty years, you get so much more of 81 00:04:14,320 --> 00:04:17,599 Speaker 2: the compounding returns versus the asset manager. 82 00:04:17,680 --> 00:04:20,320 Speaker 1: So why is this important? Why do a few basis 83 00:04:20,360 --> 00:04:24,800 Speaker 1: points here or there matter? Can that can't possibly add 84 00:04:24,880 --> 00:04:25,840 Speaker 1: up over decades? 85 00:04:25,880 --> 00:04:28,160 Speaker 2: Can it? It does. So when Bogel was trying to 86 00:04:28,200 --> 00:04:30,800 Speaker 2: sell the index fund, everybody thought, oh, it's average. I 87 00:04:30,800 --> 00:04:32,280 Speaker 2: don't want to be average. I don't want to be 88 00:04:32,320 --> 00:04:34,520 Speaker 2: worked on by an average doctor. It was hard to 89 00:04:34,560 --> 00:04:37,400 Speaker 2: sell average to the American public. We want winners. One 90 00:04:37,480 --> 00:04:40,520 Speaker 2: chart he used that was very compelling, and I tell everybody, look, 91 00:04:40,560 --> 00:04:42,559 Speaker 2: go look this up. It's a chart of the growth 92 00:04:42,560 --> 00:04:45,480 Speaker 2: of ten thousand dollars over fifty years. One of it 93 00:04:45,520 --> 00:04:47,800 Speaker 2: makes makes eight percent a year, and the other makes 94 00:04:47,800 --> 00:04:49,800 Speaker 2: six percent a year. The two percent would be the 95 00:04:49,800 --> 00:04:51,760 Speaker 2: fees you pay the active fund plus the turnover and 96 00:04:51,800 --> 00:04:55,240 Speaker 2: trading costs. The eight percent would be paying no fees. 97 00:04:55,839 --> 00:04:58,120 Speaker 2: The no fees you get something like three hundred and 98 00:04:58,240 --> 00:05:02,640 Speaker 2: sixty thousand dollars six percent. Compounding only gives you like 99 00:05:02,680 --> 00:05:06,359 Speaker 2: one hundred and seventy thousand dollars double, basically double. And 100 00:05:06,440 --> 00:05:08,160 Speaker 2: so when you put it in dollars and cents like 101 00:05:08,200 --> 00:05:10,960 Speaker 2: that over time, it really matters. And to put that 102 00:05:11,000 --> 00:05:14,800 Speaker 2: another way, that's eight percent. That took sixty percent of 103 00:05:14,839 --> 00:05:17,800 Speaker 2: your total returns over those fifty years. So with the 104 00:05:18,800 --> 00:05:21,839 Speaker 2: no fee you get basically ninety eight percent something like 105 00:05:21,880 --> 00:05:24,719 Speaker 2: that of the total returns. Because Remember we're all here 106 00:05:24,760 --> 00:05:28,719 Speaker 2: for one reason. Compounding returns the magic of compounding, and 107 00:05:28,760 --> 00:05:31,520 Speaker 2: as those returns compound, the lower the fee is, the 108 00:05:31,560 --> 00:05:34,560 Speaker 2: more that beautiful magic ends up in your pocket. 109 00:05:34,680 --> 00:05:39,520 Speaker 1: And if you're talking about larger investment dollars, Vanguard put 110 00:05:39,560 --> 00:05:42,479 Speaker 1: out a research piece some time ago that if you 111 00:05:42,520 --> 00:05:44,839 Speaker 1: put up a million dollars and let a compound over 112 00:05:44,920 --> 00:05:47,479 Speaker 1: thirty years, by the time you're at the end of 113 00:05:47,520 --> 00:05:52,000 Speaker 1: those thirty years, that feed differential is about thirty percent. 114 00:05:52,400 --> 00:05:54,880 Speaker 1: So if you start out with only one hundred, it's double. 115 00:05:55,320 --> 00:05:59,560 Speaker 1: But you know, just to talk in terms of percentage, 116 00:05:59,680 --> 00:06:02,640 Speaker 1: it's not insubstantial after two or three decades. 117 00:06:02,960 --> 00:06:06,400 Speaker 2: Yeah. Absolutely, So the difference between paying like eighty basis 118 00:06:06,440 --> 00:06:10,520 Speaker 2: points versus like eight is major. Now when we get 119 00:06:10,520 --> 00:06:14,000 Speaker 2: to eight to seven, it's a little less consequential. So 120 00:06:14,000 --> 00:06:16,000 Speaker 2: that's why I say, do we need a zero fee 121 00:06:16,040 --> 00:06:18,200 Speaker 2: ETF for fun? Not really. I think once you get 122 00:06:18,200 --> 00:06:21,520 Speaker 2: below five you're good. I don't think people. In fact, 123 00:06:21,640 --> 00:06:24,279 Speaker 2: there's almost a case you made that people sometimes repel 124 00:06:24,320 --> 00:06:26,560 Speaker 2: from zero. They feel like it's a gimmick, perhaps right. 125 00:06:26,720 --> 00:06:28,800 Speaker 2: And so what we found is that if you look 126 00:06:28,800 --> 00:06:32,080 Speaker 2: at Advisor surveys, the two most important criteria for them 127 00:06:32,160 --> 00:06:34,839 Speaker 2: in picking an ETF. Number one is fee. Number two 128 00:06:34,880 --> 00:06:37,960 Speaker 2: is brand. That's why we tend to see the money 129 00:06:38,000 --> 00:06:41,880 Speaker 2: going to the big brands. Let's say Vanguard, Blackrock definitely, 130 00:06:42,000 --> 00:06:46,240 Speaker 2: but also State Street, Invesco, Schwab. These brands plus a 131 00:06:46,279 --> 00:06:49,560 Speaker 2: low fee irresistible. But if you take a b a 132 00:06:49,560 --> 00:06:51,679 Speaker 2: brand that's not known for this. There was a company 133 00:06:51,720 --> 00:06:54,039 Speaker 2: called Focus Shares back in the day. They tried to undercut. 134 00:06:54,320 --> 00:06:57,400 Speaker 2: Nobody really cared because nobody knew that brand and it 135 00:06:57,400 --> 00:06:59,840 Speaker 2: felt gimmicky. So that's why I think the brand is 136 00:06:59,839 --> 00:07:01,800 Speaker 2: all so important here. It's not just the low fee, 137 00:07:01,800 --> 00:07:04,279 Speaker 2: it's the low fee plus the brand that is almost 138 00:07:04,320 --> 00:07:08,039 Speaker 2: like an irresistible value proposition for most people. Let me 139 00:07:08,040 --> 00:07:09,680 Speaker 2: throw a little bit of a curve ball at you. 140 00:07:10,200 --> 00:07:13,920 Speaker 2: We're talking about mutual funds and ETFs, but the reality 141 00:07:14,080 --> 00:07:17,600 Speaker 2: is that's twenty twenty five trillion dollars. There's still another 142 00:07:17,720 --> 00:07:21,920 Speaker 2: fifty trillion inequity and another I don't know, seventy five trillion. 143 00:07:21,600 --> 00:07:25,840 Speaker 1: In bonds behind that. How significant are ETFs and mutual 144 00:07:25,880 --> 00:07:28,760 Speaker 1: funds to how people manage their assets? 145 00:07:29,360 --> 00:07:32,600 Speaker 2: I think they're huge because in the end, consumers typically 146 00:07:32,920 --> 00:07:35,720 Speaker 2: like convenience. If you make something more convenient, you're probably 147 00:07:35,760 --> 00:07:37,960 Speaker 2: going to find some customers. And so to me, a 148 00:07:38,040 --> 00:07:41,280 Speaker 2: mutual fund really pushed the envelope to make convenient. You 149 00:07:41,800 --> 00:07:44,400 Speaker 2: give me your money and I'll take care of buying 150 00:07:44,440 --> 00:07:46,880 Speaker 2: all the stocks. We'll get diversification going that way. We 151 00:07:46,920 --> 00:07:49,240 Speaker 2: don't like have we don't pick one stock and it 152 00:07:49,240 --> 00:07:51,280 Speaker 2: goes to zero, we lose all our money. We'll diversify 153 00:07:51,640 --> 00:07:53,600 Speaker 2: and I'll manage it for you. The problem is the 154 00:07:54,080 --> 00:07:59,680 Speaker 2: mutual fund structure isn't nearly as efficient or there's a 155 00:07:59,720 --> 00:08:03,200 Speaker 2: multiitude of reasons. The ETF structure, in my opinion, is 156 00:08:03,240 --> 00:08:06,040 Speaker 2: a better vehicle to deliver what a mutual fund tries 157 00:08:06,080 --> 00:08:10,120 Speaker 2: to deliver, whether that's active, passive, or whatever. ETFs tend 158 00:08:10,160 --> 00:08:13,760 Speaker 2: to be more efficient, tax efficient, they tend to be cheaper. 159 00:08:14,080 --> 00:08:15,560 Speaker 2: They are you're able to get in and out them 160 00:08:15,560 --> 00:08:17,760 Speaker 2: whenever you want. Mutual funds only one time a day, 161 00:08:18,520 --> 00:08:21,680 Speaker 2: and they really fit nicely on brokerage platforms, which most 162 00:08:21,720 --> 00:08:23,920 Speaker 2: people use. And so to me, ETFs are sort of 163 00:08:23,960 --> 00:08:26,520 Speaker 2: the vehicle for the twenty first century. I've often compared 164 00:08:26,560 --> 00:08:29,040 Speaker 2: them to the MP three, whereas the mutual fund is 165 00:08:29,120 --> 00:08:32,080 Speaker 2: kind of like a compact disc MP three. I now 166 00:08:32,080 --> 00:08:33,800 Speaker 2: can buy exactly the songs I want, or if you 167 00:08:33,840 --> 00:08:36,560 Speaker 2: stream and you can add this flexibility. It fits on 168 00:08:36,600 --> 00:08:38,840 Speaker 2: your phone better, compact disc harder to you know, lug 169 00:08:38,880 --> 00:08:41,600 Speaker 2: them around. So I think every industry goes through this. 170 00:08:41,920 --> 00:08:44,439 Speaker 2: I would also say an uber to the cab that's 171 00:08:44,480 --> 00:08:47,600 Speaker 2: another industry. Uber uses the Internet. It's cleaner like some 172 00:08:47,800 --> 00:08:50,760 Speaker 2: there's always these disruptive events, and so ETFs are big. 173 00:08:50,800 --> 00:08:54,120 Speaker 2: But I got to say ETFs at eighty basis points 174 00:08:54,160 --> 00:08:56,800 Speaker 2: wouldn't be a big deal. They're only really popular in 175 00:08:56,840 --> 00:08:59,440 Speaker 2: sweeping the country because they're cheap, and you have to 176 00:08:59,440 --> 00:09:02,200 Speaker 2: give van guard in Bogel credit. That's where even though 177 00:09:02,240 --> 00:09:05,400 Speaker 2: he didn't like ETFs, he had this monumental impact on them. 178 00:09:05,400 --> 00:09:07,680 Speaker 2: So to me, whether it's an index, spetra fund or 179 00:09:07,679 --> 00:09:11,760 Speaker 2: an ETF, the bigger trend is the great cost migration. 180 00:09:11,920 --> 00:09:14,040 Speaker 2: And you got to go back to Bogel on that. 181 00:09:14,040 --> 00:09:16,520 Speaker 2: That said, when it comes to getting investments in a 182 00:09:16,520 --> 00:09:19,360 Speaker 2: low fee format, I think the ETF vehicle is the 183 00:09:19,360 --> 00:09:20,400 Speaker 2: one most people prefer. 184 00:09:21,200 --> 00:09:26,040 Speaker 1: Thanks Eric, really interesting stuff, just a relentless pressure on 185 00:09:26,160 --> 00:09:30,800 Speaker 1: prices that saved investors trillions of dollars but more importantly, 186 00:09:31,760 --> 00:09:36,040 Speaker 1: we are aware of the impact of compounding. Ten twenty 187 00:09:36,120 --> 00:09:40,240 Speaker 1: thirty basis points makes a huge difference over time, especially 188 00:09:40,320 --> 00:09:43,640 Speaker 1: if we're talking about decades, and so what lower fees 189 00:09:43,760 --> 00:09:48,439 Speaker 1: mean is better performance over the long haul for investors. 190 00:09:49,000 --> 00:10:00,560 Speaker 1: I'm Barry Ridolts. You've been listening to Bloomberg's At the Money. 191 00:10:01,160 --> 00:10:08,400 Speaker 1: What I said the father as a problems. You know 192 00:10:08,640 --> 00:10:16,040 Speaker 1: you want to say it's father as the plums. I 193 00:10:16,080 --> 00:10:21,320 Speaker 1: did be let it through. It's father as a plows. 194 00:10:23,760 --> 00:10:24,960 Speaker 1: What I'm going to do