1 00:00:00,120 --> 00:00:02,920 Speaker 1: I'm Barry Ridults, and I'm excited to tell you about 2 00:00:02,920 --> 00:00:06,360 Speaker 1: my new podcast, At the Money. Each week, I'm going 3 00:00:06,440 --> 00:00:09,479 Speaker 1: to spend about ten minutes or so diving deep into 4 00:00:09,520 --> 00:00:14,319 Speaker 1: a specific topic that affects you and your money, acquiring it, 5 00:00:14,640 --> 00:00:18,239 Speaker 1: spending it, and most of all, investing it. We'll talk 6 00:00:18,239 --> 00:00:22,959 Speaker 1: about things like portfolio construction, why fees matter, how to 7 00:00:23,000 --> 00:00:26,279 Speaker 1: build a set of bond holdings, why it matters so 8 00:00:26,520 --> 00:00:31,040 Speaker 1: much to manage your own behavior as an investor. Strap 9 00:00:31,120 --> 00:00:39,680 Speaker 1: in for At the Money. Starting right now, we. 10 00:00:39,560 --> 00:00:42,240 Speaker 2: Are committed to lowering fees to an ETA. You're competing 11 00:00:42,280 --> 00:00:45,199 Speaker 2: against people that have two basis points fees. The margins 12 00:00:45,240 --> 00:00:48,159 Speaker 2: on ETF tend to be lower than mutual funds or 13 00:00:48,200 --> 00:00:49,400 Speaker 2: other types of products. 14 00:00:51,159 --> 00:00:55,120 Speaker 1: Are fun fees going to zero? The trend for ETF 15 00:00:55,200 --> 00:01:00,000 Speaker 1: prices have been lower fees. Now, after decades of falling price, 16 00:01:00,840 --> 00:01:04,600 Speaker 1: those fees are approaching zero. Let's bring in an expert 17 00:01:04,680 --> 00:01:08,240 Speaker 1: to help us unpack this. Eric Balcunis is senior ETF 18 00:01:08,319 --> 00:01:12,360 Speaker 1: analyst at Bloomberg Intelligence. As in writing about funds and 19 00:01:12,400 --> 00:01:16,120 Speaker 1: ETFs for years, Eric, what's going on here? Are fees 20 00:01:16,200 --> 00:01:17,800 Speaker 1: going to zero? Well? 21 00:01:17,840 --> 00:01:19,680 Speaker 2: They have been for a while. There's already a couple 22 00:01:19,840 --> 00:01:23,960 Speaker 2: zero fee ETFs out there. They are from companies that 23 00:01:24,000 --> 00:01:26,240 Speaker 2: aren't as popular as a schwab or a state street. 24 00:01:26,760 --> 00:01:29,760 Speaker 2: So I think once you get below five basis points, 25 00:01:30,080 --> 00:01:32,240 Speaker 2: you get to this realm of like super dirt cheap 26 00:01:32,680 --> 00:01:35,040 Speaker 2: where people don't really care are you three or four? 27 00:01:35,319 --> 00:01:38,480 Speaker 2: Are you two or three? You know, it's all almost 28 00:01:38,600 --> 00:01:39,319 Speaker 2: free basically. 29 00:01:39,400 --> 00:01:43,119 Speaker 1: And for people who don't talk in basis points, one 30 00:01:43,160 --> 00:01:46,679 Speaker 1: percent is one hundred basis points, so we're talking about 31 00:01:46,760 --> 00:01:50,880 Speaker 1: three basis points is three percent of one percent. 32 00:01:51,000 --> 00:01:53,240 Speaker 2: Yeah, so if you put ten thousand dollars into the 33 00:01:53,240 --> 00:01:55,920 Speaker 2: three basis point ETF, it'll be three bucks a year. 34 00:01:56,720 --> 00:01:57,440 Speaker 1: That's crazy. 35 00:01:57,480 --> 00:02:00,200 Speaker 2: It is crazy. It's a beautiful thing free, Yeah, it is. 36 00:02:00,240 --> 00:02:03,320 Speaker 2: It's I call it the great cost migration. I call 37 00:02:03,360 --> 00:02:05,240 Speaker 2: it the fee wars. This is why I called the 38 00:02:05,240 --> 00:02:07,920 Speaker 2: ETF industry the terodome, because it is brutal. If you're 39 00:02:07,920 --> 00:02:11,160 Speaker 2: an issuer, everybody's cutting fees all the time. But the 40 00:02:11,200 --> 00:02:14,400 Speaker 2: thing is it works. Cutting fees almost is like batting 41 00:02:14,440 --> 00:02:16,600 Speaker 2: one thousand, and if you do that, the flows will come. 42 00:02:16,720 --> 00:02:19,920 Speaker 1: So let's put a little history in place. Back in 43 00:02:19,960 --> 00:02:23,840 Speaker 1: twenty sixteen, you wrote a column titled the Vanguard Effect, 44 00:02:23,919 --> 00:02:27,640 Speaker 1: and the takeaway was the fee pressure the Vanguard group 45 00:02:27,720 --> 00:02:31,760 Speaker 1: was putting on Wall Street was saving investors a trillion dollars. 46 00:02:32,080 --> 00:02:35,160 Speaker 2: Explain, Yeah, so if you say all the money that 47 00:02:35,680 --> 00:02:39,320 Speaker 2: went to Vanguard, if it were if Vanguard didn't exist, right, 48 00:02:40,160 --> 00:02:41,400 Speaker 2: A lot of that money is going to be in 49 00:02:41,480 --> 00:02:43,639 Speaker 2: mutual funds, which have an asset weighted average fee of 50 00:02:43,680 --> 00:02:46,600 Speaker 2: about sixty five basis points. On an average fee, they're 51 00:02:46,600 --> 00:02:48,880 Speaker 2: over one percent, but I like to asset weight it 52 00:02:48,919 --> 00:02:50,840 Speaker 2: to be fair. That just basically says where are most 53 00:02:50,880 --> 00:02:53,400 Speaker 2: of the assets? So sixty six. So if that money 54 00:02:53,440 --> 00:02:57,280 Speaker 2: were in a average Vanguard fund that charges Vanguard's age 55 00:02:57,280 --> 00:03:00,040 Speaker 2: asset weighted average is nine basis points, So that's a 56 00:03:00,120 --> 00:03:02,560 Speaker 2: huge savings. So that money moving over there, if it 57 00:03:02,600 --> 00:03:05,160 Speaker 2: weren't in Vanguard, we'll be paying sixty six instead of nine. 58 00:03:05,720 --> 00:03:09,040 Speaker 2: Then Vanguard only has half of the passive assets. The 59 00:03:09,120 --> 00:03:10,799 Speaker 2: other half are people who copy them. 60 00:03:11,000 --> 00:03:13,480 Speaker 1: So lack Rock, State Street, Schwab. 61 00:03:13,760 --> 00:03:16,720 Speaker 2: Even JP, Morgan and Goldman now have Vanguard ESK in Fidelity. 62 00:03:16,720 --> 00:03:19,160 Speaker 2: That was the ultimate sort of surrender because Fidelity has 63 00:03:19,160 --> 00:03:22,040 Speaker 2: been the active manager, but Fidelity has cheaper index funds. 64 00:03:22,040 --> 00:03:24,440 Speaker 2: Than Vanguard now, and they advertise it, so it's amazing. 65 00:03:24,480 --> 00:03:26,880 Speaker 2: So half of the other half I kind of credit 66 00:03:27,040 --> 00:03:29,400 Speaker 2: to Bogel or Vanguard. So if you add all that up, 67 00:03:29,440 --> 00:03:31,280 Speaker 2: you're looking at a trillion dollars total. But that number 68 00:03:31,360 --> 00:03:33,239 Speaker 2: grows by about one hundred and fifty billion a year, 69 00:03:33,639 --> 00:03:36,440 Speaker 2: and that number grows every year. So in the course 70 00:03:36,440 --> 00:03:38,160 Speaker 2: of the next decade or two, we're gonna look at 71 00:03:38,160 --> 00:03:40,760 Speaker 2: four or five trillion in savings just from what Bogel 72 00:03:40,800 --> 00:03:41,360 Speaker 2: and Vanguard did. 73 00:03:41,440 --> 00:03:45,560 Speaker 1: That's unbelievable. And let's flesh this out. When Vanguard launched 74 00:03:45,560 --> 00:03:49,320 Speaker 1: in nineteen seventy four, mutual fund fees were what two 75 00:03:49,360 --> 00:03:52,240 Speaker 1: percent one point eighty six, some crazy number like that. 76 00:03:52,720 --> 00:03:56,480 Speaker 1: Imagine that was it. There was hardly any competition. The 77 00:03:56,520 --> 00:03:59,600 Speaker 1: fees were what they were. This has really been half 78 00:03:59,640 --> 00:04:01,520 Speaker 1: a cent of feet pressure. 79 00:04:01,840 --> 00:04:04,960 Speaker 2: Yeah, So when I talk about how investors respond to 80 00:04:05,000 --> 00:04:08,160 Speaker 2: lower fees, it happened with Vanguard two. Vanguard's first index 81 00:04:08,200 --> 00:04:10,480 Speaker 2: fund was priced at sixty six basis points, right around 82 00:04:10,520 --> 00:04:13,320 Speaker 2: what mutual funds were, or the cheaper side, and over 83 00:04:13,400 --> 00:04:15,440 Speaker 2: time no one cared it first because that was still 84 00:04:15,480 --> 00:04:17,839 Speaker 2: kind of pricey, but over time they kept cutting the 85 00:04:17,839 --> 00:04:19,960 Speaker 2: fee because of the way their structure is. So when 86 00:04:20,000 --> 00:04:22,040 Speaker 2: they got into like the two thousands, they're now at 87 00:04:22,040 --> 00:04:25,400 Speaker 2: like fourteen twelve basis points really cheap. Then they hit 88 00:04:25,440 --> 00:04:27,440 Speaker 2: two thousand and eight twenty ten, they go under ten. 89 00:04:28,160 --> 00:04:31,600 Speaker 2: Once you get under ten, you're in like irresistible area. 90 00:04:32,279 --> 00:04:34,719 Speaker 2: People go gaga for something that's got the single digit 91 00:04:34,720 --> 00:04:37,679 Speaker 2: basis point fee, and why not. There's been major studies 92 00:04:37,720 --> 00:04:40,080 Speaker 2: that show if you pay like a cold basis points 93 00:04:40,480 --> 00:04:43,400 Speaker 2: over thirty forty years, you get so much more of 94 00:04:43,440 --> 00:04:46,719 Speaker 2: the compounding returns versus the asset manager. 95 00:04:46,800 --> 00:04:49,440 Speaker 1: So why is this important? Why do a few basis 96 00:04:49,480 --> 00:04:53,920 Speaker 1: points here or there matter? Can that can't possibly add 97 00:04:54,000 --> 00:04:55,680 Speaker 1: up over decades? Can it? 98 00:04:55,680 --> 00:04:57,640 Speaker 2: It does? So when Bogel was trying to sell the 99 00:04:57,680 --> 00:05:00,400 Speaker 2: index fund, everybody thought, oh, it's average. I don't want 100 00:05:00,400 --> 00:05:01,800 Speaker 2: to be average. I don't want be worked on by 101 00:05:01,839 --> 00:05:04,320 Speaker 2: an average doctor. It was hard to sell average to 102 00:05:04,320 --> 00:05:07,280 Speaker 2: the American public. We want winners. One chart he used 103 00:05:07,279 --> 00:05:09,720 Speaker 2: that was very compelling, and I tell everybody, look, go 104 00:05:09,800 --> 00:05:11,760 Speaker 2: look this up. It's a chart of the growth of 105 00:05:11,800 --> 00:05:14,920 Speaker 2: ten thousand dollars over fifty years. One of it makes 106 00:05:15,160 --> 00:05:17,120 Speaker 2: makes eight percent a year, and the other makes six 107 00:05:17,120 --> 00:05:19,200 Speaker 2: percent a year. The two percent would be the fees 108 00:05:19,200 --> 00:05:21,600 Speaker 2: you pay the active fund plus the turnover and trading costs. 109 00:05:21,960 --> 00:05:25,200 Speaker 2: The eight percent would be paying no fees. The no 110 00:05:25,279 --> 00:05:28,440 Speaker 2: fees you get something like three hundred and sixty thousand dollars. 111 00:05:28,880 --> 00:05:32,239 Speaker 2: The six percent compounding only gives you like one hundred 112 00:05:32,279 --> 00:05:33,400 Speaker 2: and seventy thousand. 113 00:05:33,160 --> 00:05:35,000 Speaker 1: Dollars, basically double. 114 00:05:35,400 --> 00:05:37,200 Speaker 2: And so when you put it in dollars and cents 115 00:05:37,240 --> 00:05:40,039 Speaker 2: like that over time, it really matters. And to put 116 00:05:40,040 --> 00:05:43,800 Speaker 2: that another way, that's eight percent. That took sixty percent 117 00:05:43,839 --> 00:05:46,760 Speaker 2: of your total returns over those fifty years. So with 118 00:05:46,880 --> 00:05:50,080 Speaker 2: the with the no fee, you get basically ninety eight 119 00:05:50,120 --> 00:05:53,119 Speaker 2: percent something like that of the total returns. Because remember 120 00:05:53,279 --> 00:05:56,640 Speaker 2: we're all here for one reason. Compounding returns the magic 121 00:05:56,680 --> 00:06:00,120 Speaker 2: of compounding, and as those returns compound, the lower the 122 00:06:00,200 --> 00:06:02,880 Speaker 2: fee is, the more that beautiful magic ends up in 123 00:06:02,920 --> 00:06:03,680 Speaker 2: your pocket. 124 00:06:03,800 --> 00:06:08,680 Speaker 1: And if you're talking about larger investment dollars, Vanguard put 125 00:06:08,720 --> 00:06:11,640 Speaker 1: out a research piece some time ago that if you 126 00:06:11,640 --> 00:06:13,960 Speaker 1: put up a million dollars and let a compound over 127 00:06:14,040 --> 00:06:16,640 Speaker 1: thirty years, by the time you're at the end of 128 00:06:16,640 --> 00:06:21,120 Speaker 1: those thirty years, that fee differential is about thirty percent 129 00:06:21,560 --> 00:06:24,039 Speaker 1: so if you start out with only one hundred, it's double. 130 00:06:24,440 --> 00:06:28,720 Speaker 1: But you know, just to talk in terms of percentage, 131 00:06:29,040 --> 00:06:31,760 Speaker 1: it's not insubstantial after two or three decades. 132 00:06:32,080 --> 00:06:35,560 Speaker 2: Yeah. Absolutely, So the difference between paying like eighty basis 133 00:06:35,560 --> 00:06:39,640 Speaker 2: points versus like eight is major. Now when we get 134 00:06:39,680 --> 00:06:43,120 Speaker 2: to eight to seven, it's a little less consequential. So 135 00:06:43,160 --> 00:06:45,120 Speaker 2: that's why I say, do we need a zero fee 136 00:06:45,160 --> 00:06:47,320 Speaker 2: ETF for fun? Not really. I think once you get 137 00:06:47,320 --> 00:06:50,640 Speaker 2: below five, you're good. I don't think people. In fact, 138 00:06:50,800 --> 00:06:53,400 Speaker 2: there's almost a case you made that people sometimes repel 139 00:06:53,440 --> 00:06:55,680 Speaker 2: from zero. They feel like it's a gimmick. Perhaps right. 140 00:06:55,839 --> 00:06:57,920 Speaker 2: And so what we found is that if you look 141 00:06:57,960 --> 00:07:01,320 Speaker 2: at Advisor surveys, the two most criteria for them and 142 00:07:01,400 --> 00:07:04,440 Speaker 2: picking an ETF. Number one is feet, Number two is brand. 143 00:07:04,920 --> 00:07:07,560 Speaker 2: That's why we tend to see the money going to 144 00:07:07,640 --> 00:07:11,520 Speaker 2: the big brands, let's say Vanguard, Blackrock definitely, but also 145 00:07:11,560 --> 00:07:16,720 Speaker 2: State Street, Invesco, Schwab. These brands plus a low fee irresistible. 146 00:07:17,200 --> 00:07:19,920 Speaker 2: But if you take a brand that's not known for this. 147 00:07:20,200 --> 00:07:22,120 Speaker 2: There was a company called Focus Shares back in the day. 148 00:07:22,120 --> 00:07:25,600 Speaker 2: They tried to undercut Nobody really cared because nobody knew 149 00:07:25,640 --> 00:07:28,280 Speaker 2: that brand, and it felt gimmicky. So that's why I 150 00:07:28,280 --> 00:07:30,440 Speaker 2: think the brand is also important here. It's not just 151 00:07:30,480 --> 00:07:32,160 Speaker 2: the low fee, it's the low fee plus the brand 152 00:07:32,560 --> 00:07:36,600 Speaker 2: that is almost like an irresistible value proposition for most people. 153 00:07:36,880 --> 00:07:38,480 Speaker 1: Let me throw a little bit of a curve ball 154 00:07:38,520 --> 00:07:42,240 Speaker 1: at you. We're talking about mutual funds and ETFs, but 155 00:07:42,400 --> 00:07:46,160 Speaker 1: the reality is that's twenty twenty five trillion dollars. There's 156 00:07:46,160 --> 00:07:49,720 Speaker 1: still another fifty trillion inequity and another I don't know, 157 00:07:49,760 --> 00:07:53,720 Speaker 1: seventy five trillion in bonds behind that. How significant are 158 00:07:53,840 --> 00:07:57,880 Speaker 1: ETFs and mutual funds to how people manage their assets? 159 00:07:58,480 --> 00:08:01,720 Speaker 2: I think they're huge because in the end, consumers typically 160 00:08:02,040 --> 00:08:04,880 Speaker 2: like convenience. If you make something more convenient, you're probably 161 00:08:04,880 --> 00:08:07,080 Speaker 2: going to find some customers. And so to me, a 162 00:08:07,160 --> 00:08:10,400 Speaker 2: mutual fund really push the envelope to make convenient. You 163 00:08:10,920 --> 00:08:13,520 Speaker 2: give me your money, and I'll take care of buying 164 00:08:13,560 --> 00:08:16,000 Speaker 2: all the stocks. We'll get diversification going that way. We 165 00:08:16,040 --> 00:08:18,360 Speaker 2: don't like have we don't pick one stock and it 166 00:08:18,400 --> 00:08:20,400 Speaker 2: goes to zero, we lose all our money. We'll diversify 167 00:08:20,760 --> 00:08:22,720 Speaker 2: and I'll manage it for you. The problem is the 168 00:08:23,200 --> 00:08:28,880 Speaker 2: mutual fund structure isn't nearly as efficient, or there's a 169 00:08:28,920 --> 00:08:32,320 Speaker 2: multitude of reasons. The ETF structure, in my opinion, is 170 00:08:32,360 --> 00:08:35,160 Speaker 2: a better vehicle to deliver what a mutual fund tries 171 00:08:35,200 --> 00:08:39,240 Speaker 2: to deliver, whether that's active, passive, or whatever. ETFs tend 172 00:08:39,280 --> 00:08:42,880 Speaker 2: to be more efficient, tax efficient, they tend to be cheaper. 173 00:08:43,200 --> 00:08:44,680 Speaker 2: They are you're able to get in and out them 174 00:08:44,679 --> 00:08:46,880 Speaker 2: whenever you want. Mutual funds only one time a day, 175 00:08:47,640 --> 00:08:50,839 Speaker 2: and they really fit nicely on brokerage platforms, which most 176 00:08:50,840 --> 00:08:53,040 Speaker 2: people use. And so to me, ETFs are sort of 177 00:08:53,080 --> 00:08:55,640 Speaker 2: the vehicle for the twenty first century. I've often compared 178 00:08:55,679 --> 00:08:58,199 Speaker 2: them to the MP three, whereas the mutual fund is 179 00:08:58,240 --> 00:09:01,520 Speaker 2: kind of like a compact discreet. I now can buy 180 00:09:01,520 --> 00:09:03,960 Speaker 2: exactly the songs I want, or if you stream and 181 00:09:04,080 --> 00:09:06,320 Speaker 2: you can add this flexibility. It fits on your phone better, 182 00:09:06,520 --> 00:09:08,880 Speaker 2: compact disc harder to you know, lug them around. So 183 00:09:08,920 --> 00:09:11,600 Speaker 2: I think every industry goes through this. I would also 184 00:09:11,600 --> 00:09:14,640 Speaker 2: say an uber to the cab. That's another industry. Uber 185 00:09:14,720 --> 00:09:17,439 Speaker 2: uses the Internet. It's cleaner like some of there's always 186 00:09:17,480 --> 00:09:20,520 Speaker 2: these disruptive events, and so ETFs are big. But I 187 00:09:20,559 --> 00:09:23,800 Speaker 2: gotta say ETFs at eighty basis points wouldn't be a 188 00:09:23,800 --> 00:09:26,760 Speaker 2: big deal. They're only really popular in sweeping the country 189 00:09:26,760 --> 00:09:29,439 Speaker 2: because they're cheap, and you have to give Vanguard and 190 00:09:29,520 --> 00:09:32,479 Speaker 2: Bogel credit. That's where even though he didn't like ETFs, 191 00:09:32,760 --> 00:09:35,160 Speaker 2: he had this monumental impact on them. So to me, 192 00:09:35,240 --> 00:09:37,880 Speaker 2: whether it's an index mutual fund or an ETF, the 193 00:09:37,920 --> 00:09:41,680 Speaker 2: bigger trend is the great cost migration, and you got 194 00:09:41,679 --> 00:09:43,960 Speaker 2: to go back to Bogel on that. That said, when 195 00:09:44,000 --> 00:09:46,600 Speaker 2: it comes to getting investments in a low fee format, 196 00:09:46,960 --> 00:09:49,520 Speaker 2: I think the ETF vehicle is the one most people prefer. 197 00:09:50,320 --> 00:09:55,160 Speaker 1: Thanks Eric, really interesting stuff, just a relentless pressure on 198 00:09:55,320 --> 00:09:59,920 Speaker 1: prices that saved investors trillions of dollars. But more importantly, 199 00:10:00,880 --> 00:10:05,200 Speaker 1: we are aware of the impact of compounding ten twenty 200 00:10:05,280 --> 00:10:09,440 Speaker 1: thirty basis points makes a huge difference over time, especially 201 00:10:09,440 --> 00:10:12,760 Speaker 1: if we're talking about decades, and so what lower fees 202 00:10:12,880 --> 00:10:19,840 Speaker 1: mean is better performance over the long haul for investors. 203 00:10:21,080 --> 00:10:24,000 Speaker 1: You can listen to At the Money every week, finding 204 00:10:24,120 --> 00:10:27,160 Speaker 1: in our Masters and business feed at Bloomberg dot com, 205 00:10:27,160 --> 00:10:30,800 Speaker 1: Apple Podcasts and Spotify. Each week we'll be here to 206 00:10:30,840 --> 00:10:34,319 Speaker 1: discuss the issues that matter most to you as an investor. 207 00:10:34,720 --> 00:10:37,800 Speaker 1: I'm Barry Ritolts, you've been listening to At the Money 208 00:10:38,040 --> 00:10:43,160 Speaker 1: on Bloomberg Radio.