WEBVTT - At the Money: Why Fees Really Matter

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<v Speaker 1>You know what I say, where they are fun fees

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<v Speaker 1>going to zero? The trend for ETF prices has been

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<v Speaker 1>lower fees. Now, after a decade of falling prices, those

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<v Speaker 1>fees are approaching zero. Let's bring in an expert to

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<v Speaker 1>help us unpack this. Eric Balchunis's senior ETF analyst at

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<v Speaker 1>Bloomberg Intelligence who writes about funds and ETFs for years. Eric,

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<v Speaker 1>what's going on here with fees? Are they going to zero? Well?

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<v Speaker 2>They have been for a while. There's already a couple

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<v Speaker 2>zero fee ETFs out there. They are from companies that

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<v Speaker 2>aren't as popular as a Schwab or a State Street.

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<v Speaker 2>So I think once you get below five basis points,

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<v Speaker 2>you get to this realm of like super dirt cheap

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<v Speaker 2>where people don't really care are you three or four?

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<v Speaker 2>Are you two or three? You know, it's all almost

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<v Speaker 2>free basically.

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<v Speaker 1>And for people who don't talk in basis points, one

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<v Speaker 1>percent is one hundred basis points, so we're talking about

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<v Speaker 1>three basis points is three percent of one percent.

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<v Speaker 2>Yeah, So if you put ten thousand dollars into the

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<v Speaker 2>three basis point ETF, it'll be three bucks a year.

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<v Speaker 2>That's crazy, It is crazy. It's a beautiful thing.

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<v Speaker 1>Free.

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<v Speaker 2>Yeah, it is. I call it the great cost migration.

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<v Speaker 2>I call it the fee wars. This is why I

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<v Speaker 2>call the ETF industry the terrodome, because it is brutal.

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<v Speaker 2>If you're an issuer. Everybody's cutting fees all the time.

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<v Speaker 2>But the thing is it works. Cutting fees almost is

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<v Speaker 2>like batting a thousand. If you do that, the flows

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<v Speaker 2>will come.

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<v Speaker 1>So let's put a little history in place. Back in

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<v Speaker 1>twenty sixteen, you wrote a column titled the Vanguard Effect,

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<v Speaker 1>and the takeaway was the fee pressure the Vanguard group

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<v Speaker 1>was putting on Wall Street was saving investors a trillion dollars. Explain.

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<v Speaker 2>Yeah, So if you say all the money that went

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<v Speaker 2>to Vanguard, if it were if Vanguard didn't exist, right,

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<v Speaker 2>a lot of that money is going to be in

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<v Speaker 2>mutual funds which have an asset weighted average fee of

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<v Speaker 2>about sixty five basis points on an average fee, they're

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<v Speaker 2>over one percent. But I like to asset weight it

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<v Speaker 2>to be fair. That just basically says where are most

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<v Speaker 2>of the assets? So sixty six. So if that money

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<v Speaker 2>were in a average Vanguard fund that charges Vanguard's asset

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<v Speaker 2>weighted averages nine basis points. So that's a huge saving.

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<v Speaker 2>So that money moving over there, if it weren't in Vanguard,

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<v Speaker 2>we'll be paying sixty six instead of nine. Then Vanguard

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<v Speaker 2>only has half of the passive assets. The other half

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<v Speaker 2>are people who copy them, so Lack Rocky, State Street, Schwab,

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<v Speaker 2>even JP, Morgan and Goldman now have Vanguard ESK Infidelity.

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<v Speaker 2>That was the ultimate sort of surrender because Fidelity has

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<v Speaker 2>been the active manager. But Fidelity has cheaper index funds

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<v Speaker 2>than Vanguard now and they advertise it. So it's amazing.

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<v Speaker 2>So half of the other half I kind of credit

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<v Speaker 2>to Bogel or Vanguard. So if you add all that up,

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<v Speaker 2>you're looking at a trillion dollars total. But that number

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<v Speaker 2>grows by about one hundred and fifty billion a year,

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<v Speaker 2>and that number grows every year. So in the course

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<v Speaker 2>of the next decade or two, we're gonna look at

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<v Speaker 2>four or five trillion in savings just from what Bogul

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<v Speaker 2>and Vanguard did.

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<v Speaker 1>That's unbelievable. And let's flesh this out. When Vanguard launched

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<v Speaker 1>in nineteen seventy four, mutual fund fees were what two

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<v Speaker 1>percent one point eighty six some crazy number like that.

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<v Speaker 1>Imagine that was it. There was hardly any competition. The

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<v Speaker 1>fees were what they were. This has really been half

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<v Speaker 1>a century of feet pressure.

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<v Speaker 2>Yeah, So when I talk about how investors respond to

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<v Speaker 2>lower fees, it happened with Vanguard two. Vanguard's first index

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<v Speaker 2>fund was priced at sixty six basis points, right around

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<v Speaker 2>what mutual funds were, or the cheaper side, And over

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<v Speaker 2>time no one cared at first because that was still

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<v Speaker 2>kind of pricey. But over time they kept cutting the

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<v Speaker 2>fee because of the way their structure is. So when

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<v Speaker 2>they got into like the two thousands, they're now at

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<v Speaker 2>like fourteen twelve basis points really cheap. Then they hit

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<v Speaker 2>two thousand and eight twenty ten, they go under ten.

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<v Speaker 2>Once you get under ten and you're in like irresistible area,

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<v Speaker 2>people go gaga for something that's got the single digit

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<v Speaker 2>basis point fee. And why not. There's been major studies

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<v Speaker 2>that show if you pay like a couple basis points

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<v Speaker 2>over thirty forty years, you get so much more of

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<v Speaker 2>the compounding returns versus the asset manager.

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<v Speaker 1>So why is this important? Why do a few basis

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<v Speaker 1>points here or there matter? Can that can't possibly add

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<v Speaker 1>up over decades?

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<v Speaker 2>Can it? It does. So when Bogel was trying to

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<v Speaker 2>sell the index fund, everybody thought, oh, it's average. I

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<v Speaker 2>don't want to be average. I don't want to be

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<v Speaker 2>worked on by an average doctor. It was hard to

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<v Speaker 2>sell average to the American public. We want winners. One

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<v Speaker 2>chart he used that was very compelling, and I tell everybody, look,

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<v Speaker 2>go look this up. It's a chart of the growth

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<v Speaker 2>of ten thousand dollars over fifty years. One of it

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<v Speaker 2>makes makes eight percent a year, and the other makes

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<v Speaker 2>six percent a year. The two percent would be the

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<v Speaker 2>fees you pay the active fund plus the turnover and

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<v Speaker 2>trading costs. The eight percent would be paying no fees.

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<v Speaker 2>The no fees you get something like three hundred and

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<v Speaker 2>sixty thousand dollars six percent. Compounding only gives you like

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<v Speaker 2>one hundred and seventy thousand dollars double, basically double. And

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<v Speaker 2>so when you put it in dollars and cents like

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<v Speaker 2>that over time, it really matters. And to put that

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<v Speaker 2>another way, that's eight percent. That took sixty percent of

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<v Speaker 2>your total returns over those fifty years. So with the

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<v Speaker 2>no fee you get basically ninety eight percent something like

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<v Speaker 2>that of the total returns. Because Remember we're all here

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<v Speaker 2>for one reason. Compounding returns the magic of compounding, and

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<v Speaker 2>as those returns compound, the lower the fee is, the

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<v Speaker 2>more that beautiful magic ends up in your pocket.

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<v Speaker 1>And if you're talking about larger investment dollars, Vanguard put

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<v Speaker 1>out a research piece some time ago that if you

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<v Speaker 1>put up a million dollars and let a compound over

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<v Speaker 1>thirty years, by the time you're at the end of

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<v Speaker 1>those thirty years, that feed differential is about thirty percent.

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<v Speaker 1>So if you start out with only one hundred, it's double.

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<v Speaker 1>But you know, just to talk in terms of percentage,

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<v Speaker 1>it's not insubstantial after two or three decades.

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<v Speaker 2>Yeah. Absolutely, So the difference between paying like eighty basis

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<v Speaker 2>points versus like eight is major. Now when we get

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<v Speaker 2>to eight to seven, it's a little less consequential. So

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<v Speaker 2>that's why I say, do we need a zero fee

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<v Speaker 2>ETF for fun? Not really. I think once you get

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<v Speaker 2>below five you're good. I don't think people. In fact,

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<v Speaker 2>there's almost a case you made that people sometimes repel

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<v Speaker 2>from zero. They feel like it's a gimmick, perhaps right.

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<v Speaker 2>And so what we found is that if you look

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<v Speaker 2>at Advisor surveys, the two most important criteria for them

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<v Speaker 2>in picking an ETF. Number one is fee. Number two

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<v Speaker 2>is brand. That's why we tend to see the money

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<v Speaker 2>going to the big brands. Let's say Vanguard, Blackrock definitely,

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<v Speaker 2>but also State Street, Invesco, Schwab. These brands plus a

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<v Speaker 2>low fee irresistible. But if you take a b a

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<v Speaker 2>brand that's not known for this. There was a company

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<v Speaker 2>called Focus Shares back in the day. They tried to undercut.

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<v Speaker 2>Nobody really cared because nobody knew that brand and it

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<v Speaker 2>felt gimmicky. So that's why I think the brand is

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<v Speaker 2>all so important here. It's not just the low fee,

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<v Speaker 2>it's the low fee plus the brand that is almost

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<v Speaker 2>like an irresistible value proposition for most people. Let me

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<v Speaker 2>throw a little bit of a curve ball at you.

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<v Speaker 2>We're talking about mutual funds and ETFs, but the reality

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<v Speaker 2>is that's twenty twenty five trillion dollars. There's still another

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<v Speaker 2>fifty trillion inequity and another I don't know, seventy five trillion.

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<v Speaker 1>In bonds behind that. How significant are ETFs and mutual

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<v Speaker 1>funds to how people manage their assets?

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<v Speaker 2>I think they're huge because in the end, consumers typically

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<v Speaker 2>like convenience. If you make something more convenient, you're probably

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<v Speaker 2>going to find some customers. And so to me, a

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<v Speaker 2>mutual fund really pushed the envelope to make convenient. You

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<v Speaker 2>give me your money and I'll take care of buying

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<v Speaker 2>all the stocks. We'll get diversification going that way. We

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<v Speaker 2>don't like have we don't pick one stock and it

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<v Speaker 2>goes to zero, we lose all our money. We'll diversify

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<v Speaker 2>and I'll manage it for you. The problem is the

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<v Speaker 2>mutual fund structure isn't nearly as efficient or there's a

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<v Speaker 2>multiitude of reasons. The ETF structure, in my opinion, is

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<v Speaker 2>a better vehicle to deliver what a mutual fund tries

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<v Speaker 2>to deliver, whether that's active, passive, or whatever. ETFs tend

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<v Speaker 2>to be more efficient, tax efficient, they tend to be cheaper.

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<v Speaker 2>They are you're able to get in and out them

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<v Speaker 2>whenever you want. Mutual funds only one time a day,

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<v Speaker 2>and they really fit nicely on brokerage platforms, which most

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<v Speaker 2>people use. And so to me, ETFs are sort of

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<v Speaker 2>the vehicle for the twenty first century. I've often compared

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<v Speaker 2>them to the MP three, whereas the mutual fund is

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<v Speaker 2>kind of like a compact disc MP three. I now

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<v Speaker 2>can buy exactly the songs I want, or if you

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<v Speaker 2>stream and you can add this flexibility. It fits on

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<v Speaker 2>your phone better, compact disc harder to you know, lug

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<v Speaker 2>them around. So I think every industry goes through this.

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<v Speaker 2>I would also say an uber to the cab that's

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<v Speaker 2>another industry. Uber uses the Internet. It's cleaner like some

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<v Speaker 2>there's always these disruptive events, and so ETFs are big.

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<v Speaker 2>But I got to say ETFs at eighty basis points

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<v Speaker 2>wouldn't be a big deal. They're only really popular in

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<v Speaker 2>sweeping the country because they're cheap, and you have to

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<v Speaker 2>give van guard in Bogel credit. That's where even though

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<v Speaker 2>he didn't like ETFs, he had this monumental impact on them.

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<v Speaker 2>So to me, whether it's an index, spetra fund or

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<v Speaker 2>an ETF, the bigger trend is the great cost migration.

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<v Speaker 2>And you got to go back to Bogel on that.

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<v Speaker 2>That said, when it comes to getting investments in a

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<v Speaker 2>low fee format, I think the ETF vehicle is the

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<v Speaker 2>one most people prefer.

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<v Speaker 1>Thanks Eric, really interesting stuff, just a relentless pressure on

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<v Speaker 1>prices that saved investors trillions of dollars but more importantly,

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<v Speaker 1>we are aware of the impact of compounding. Ten twenty

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<v Speaker 1>thirty basis points makes a huge difference over time, especially

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<v Speaker 1>if we're talking about decades, and so what lower fees

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<v Speaker 1>mean is better performance over the long haul for investors.

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<v Speaker 1>I'm Barry Ridolts. You've been listening to Bloomberg's At the Money.

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<v Speaker 1>What I said the father as a problems. You know

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<v Speaker 1>you want to say it's father as the plums. I

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<v Speaker 1>did be let it through. It's father as a plows.

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<v Speaker 1>What I'm going to do