Speaker 1: You know what I say, where they are fun fees
Speaker 1: going to zero? The trend for ETF prices has been
Speaker 1: lower fees. Now, after a decade of falling prices, those
Speaker 1: fees are approaching zero. Let's bring in an expert to
Speaker 1: help us unpack this. Eric Balchunis's senior ETF analyst at
Speaker 1: Bloomberg Intelligence who writes about funds and ETFs for years. Eric,
Speaker 1: what's going on here with fees? Are they going to zero? Well?
Speaker 2: They have been for a while. There's already a couple
Speaker 2: zero fee ETFs out there. They are from companies that
Speaker 2: aren't as popular as a Schwab or a State Street.
Speaker 2: So I think once you get below five basis points,
Speaker 2: you get to this realm of like super dirt cheap
Speaker 2: where people don't really care are you three or four?
Speaker 2: Are you two or three? You know, it's all almost
Speaker 2: free basically.
Speaker 1: And for people who don't talk in basis points, one
Speaker 1: percent is one hundred basis points, so we're talking about
Speaker 1: three basis points is three percent of one percent.
Speaker 2: Yeah, So if you put ten thousand dollars into the
Speaker 2: three basis point ETF, it'll be three bucks a year.
Speaker 2: That's crazy, It is crazy. It's a beautiful thing.
Speaker 1: Free.
Speaker 2: Yeah, it is. I call it the great cost migration.
Speaker 2: I call it the fee wars. This is why I
Speaker 2: call the ETF industry the terrodome, because it is brutal.
Speaker 2: If you're an issuer. Everybody's cutting fees all the time.
Speaker 2: But the thing is it works. Cutting fees almost is
Speaker 2: like batting a thousand. If you do that, the flows
Speaker 2: will come.
Speaker 1: So let's put a little history in place. Back in
Speaker 1: twenty sixteen, you wrote a column titled the Vanguard Effect,
Speaker 1: and the takeaway was the fee pressure the Vanguard group
Speaker 1: was putting on Wall Street was saving investors a trillion dollars. Explain.
Speaker 2: Yeah, So if you say all the money that went
Speaker 2: to Vanguard, if it were if Vanguard didn't exist, right,
Speaker 2: a lot of that money is going to be in
Speaker 2: mutual funds which have an asset weighted average fee of
Speaker 2: about sixty five basis points on an average fee, they're
Speaker 2: over one percent. But I like to asset weight it
Speaker 2: to be fair. That just basically says where are most
Speaker 2: of the assets? So sixty six. So if that money
Speaker 2: were in a average Vanguard fund that charges Vanguard's asset
Speaker 2: weighted averages nine basis points. So that's a huge saving.
Speaker 2: So that money moving over there, if it weren't in Vanguard,
Speaker 2: we'll be paying sixty six instead of nine. Then Vanguard
Speaker 2: only has half of the passive assets. The other half
Speaker 2: are people who copy them, so Lack Rocky, State Street, Schwab,
Speaker 2: even JP, Morgan and Goldman now have Vanguard ESK Infidelity.
Speaker 2: That was the ultimate sort of surrender because Fidelity has
Speaker 2: been the active manager. But Fidelity has cheaper index funds
Speaker 2: than Vanguard now and they advertise it. So it's amazing.
Speaker 2: So half of the other half I kind of credit
Speaker 2: to Bogel or Vanguard. So if you add all that up,
Speaker 2: you're looking at a trillion dollars total. But that number
Speaker 2: grows by about one hundred and fifty billion a year,
Speaker 2: and that number grows every year. So in the course
Speaker 2: of the next decade or two, we're gonna look at
Speaker 2: four or five trillion in savings just from what Bogul
Speaker 2: and Vanguard did.
Speaker 1: That's unbelievable. And let's flesh this out. When Vanguard launched
Speaker 1: in nineteen seventy four, mutual fund fees were what two
Speaker 1: percent one point eighty six some crazy number like that.
Speaker 1: Imagine that was it. There was hardly any competition. The
Speaker 1: fees were what they were. This has really been half
Speaker 1: a century of feet pressure.
Speaker 2: Yeah, So when I talk about how investors respond to
Speaker 2: lower fees, it happened with Vanguard two. Vanguard's first index
Speaker 2: fund was priced at sixty six basis points, right around
Speaker 2: what mutual funds were, or the cheaper side, And over
Speaker 2: time no one cared at first because that was still
Speaker 2: kind of pricey. But over time they kept cutting the
Speaker 2: fee because of the way their structure is. So when
Speaker 2: they got into like the two thousands, they're now at
Speaker 2: like fourteen twelve basis points really cheap. Then they hit
Speaker 2: two thousand and eight twenty ten, they go under ten.
Speaker 2: Once you get under ten and you're in like irresistible area,
Speaker 2: people go gaga for something that's got the single digit
Speaker 2: basis point fee. And why not. There's been major studies
Speaker 2: that show if you pay like a couple basis points
Speaker 2: over thirty forty years, you get so much more of
Speaker 2: the compounding returns versus the asset manager.
Speaker 1: So why is this important? Why do a few basis
Speaker 1: points here or there matter? Can that can't possibly add
Speaker 1: up over decades?
Speaker 2: Can it? It does. So when Bogel was trying to
Speaker 2: sell the index fund, everybody thought, oh, it's average. I
Speaker 2: don't want to be average. I don't want to be
Speaker 2: worked on by an average doctor. It was hard to
Speaker 2: sell average to the American public. We want winners. One
Speaker 2: chart he used that was very compelling, and I tell everybody, look,
Speaker 2: go look this up. It's a chart of the growth
Speaker 2: of ten thousand dollars over fifty years. One of it
Speaker 2: makes makes eight percent a year, and the other makes
Speaker 2: six percent a year. The two percent would be the
Speaker 2: fees you pay the active fund plus the turnover and
Speaker 2: trading costs. The eight percent would be paying no fees.
Speaker 2: The no fees you get something like three hundred and
Speaker 2: sixty thousand dollars six percent. Compounding only gives you like
Speaker 2: one hundred and seventy thousand dollars double, basically double. And
Speaker 2: so when you put it in dollars and cents like
Speaker 2: that over time, it really matters. And to put that
Speaker 2: another way, that's eight percent. That took sixty percent of
Speaker 2: your total returns over those fifty years. So with the
Speaker 2: no fee you get basically ninety eight percent something like
Speaker 2: that of the total returns. Because Remember we're all here
Speaker 2: for one reason. Compounding returns the magic of compounding, and
Speaker 2: as those returns compound, the lower the fee is, the
Speaker 2: more that beautiful magic ends up in your pocket.
Speaker 1: And if you're talking about larger investment dollars, Vanguard put
Speaker 1: out a research piece some time ago that if you
Speaker 1: put up a million dollars and let a compound over
Speaker 1: thirty years, by the time you're at the end of
Speaker 1: those thirty years, that feed differential is about thirty percent.
Speaker 1: So if you start out with only one hundred, it's double.
Speaker 1: But you know, just to talk in terms of percentage,
Speaker 1: it's not insubstantial after two or three decades.
Speaker 2: Yeah. Absolutely, So the difference between paying like eighty basis
Speaker 2: points versus like eight is major. Now when we get
Speaker 2: to eight to seven, it's a little less consequential. So
Speaker 2: that's why I say, do we need a zero fee
Speaker 2: ETF for fun? Not really. I think once you get
Speaker 2: below five you're good. I don't think people. In fact,
Speaker 2: there's almost a case you made that people sometimes repel
Speaker 2: from zero. They feel like it's a gimmick, perhaps right.
Speaker 2: And so what we found is that if you look
Speaker 2: at Advisor surveys, the two most important criteria for them
Speaker 2: in picking an ETF. Number one is fee. Number two
Speaker 2: is brand. That's why we tend to see the money
Speaker 2: going to the big brands. Let's say Vanguard, Blackrock definitely,
Speaker 2: but also State Street, Invesco, Schwab. These brands plus a
Speaker 2: low fee irresistible. But if you take a b a
Speaker 2: brand that's not known for this. There was a company
Speaker 2: called Focus Shares back in the day. They tried to undercut.
Speaker 2: Nobody really cared because nobody knew that brand and it
Speaker 2: felt gimmicky. So that's why I think the brand is
Speaker 2: all so important here. It's not just the low fee,
Speaker 2: it's the low fee plus the brand that is almost
Speaker 2: like an irresistible value proposition for most people. Let me
Speaker 2: throw a little bit of a curve ball at you.
Speaker 2: We're talking about mutual funds and ETFs, but the reality
Speaker 2: is that's twenty twenty five trillion dollars. There's still another
Speaker 2: fifty trillion inequity and another I don't know, seventy five trillion.
Speaker 1: In bonds behind that. How significant are ETFs and mutual
Speaker 1: funds to how people manage their assets?
Speaker 2: I think they're huge because in the end, consumers typically
Speaker 2: like convenience. If you make something more convenient, you're probably
Speaker 2: going to find some customers. And so to me, a
Speaker 2: mutual fund really pushed the envelope to make convenient. You
Speaker 2: give me your money and I'll take care of buying
Speaker 2: all the stocks. We'll get diversification going that way. We
Speaker 2: don't like have we don't pick one stock and it
Speaker 2: goes to zero, we lose all our money. We'll diversify
Speaker 2: and I'll manage it for you. The problem is the
Speaker 2: mutual fund structure isn't nearly as efficient or there's a
Speaker 2: multiitude of reasons. The ETF structure, in my opinion, is
Speaker 2: a better vehicle to deliver what a mutual fund tries
Speaker 2: to deliver, whether that's active, passive, or whatever. ETFs tend
Speaker 2: to be more efficient, tax efficient, they tend to be cheaper.
Speaker 2: They are you're able to get in and out them
Speaker 2: whenever you want. Mutual funds only one time a day,
Speaker 2: and they really fit nicely on brokerage platforms, which most
Speaker 2: people use. And so to me, ETFs are sort of
Speaker 2: the vehicle for the twenty first century. I've often compared
Speaker 2: them to the MP three, whereas the mutual fund is
Speaker 2: kind of like a compact disc MP three. I now
Speaker 2: can buy exactly the songs I want, or if you
Speaker 2: stream and you can add this flexibility. It fits on
Speaker 2: your phone better, compact disc harder to you know, lug
Speaker 2: them around. So I think every industry goes through this.
Speaker 2: I would also say an uber to the cab that's
Speaker 2: another industry. Uber uses the Internet. It's cleaner like some
Speaker 2: there's always these disruptive events, and so ETFs are big.
Speaker 2: But I got to say ETFs at eighty basis points
Speaker 2: wouldn't be a big deal. They're only really popular in
Speaker 2: sweeping the country because they're cheap, and you have to
Speaker 2: give van guard in Bogel credit. That's where even though
Speaker 2: he didn't like ETFs, he had this monumental impact on them.
Speaker 2: So to me, whether it's an index, spetra fund or
Speaker 2: an ETF, the bigger trend is the great cost migration.
Speaker 2: And you got to go back to Bogel on that.
Speaker 2: That said, when it comes to getting investments in a
Speaker 2: low fee format, I think the ETF vehicle is the
Speaker 2: one most people prefer.
Speaker 1: Thanks Eric, really interesting stuff, just a relentless pressure on
Speaker 1: prices that saved investors trillions of dollars but more importantly,
Speaker 1: we are aware of the impact of compounding. Ten twenty
Speaker 1: thirty basis points makes a huge difference over time, especially
Speaker 1: if we're talking about decades, and so what lower fees
Speaker 1: mean is better performance over the long haul for investors.
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