WEBVTT - At the Money: Why Fees Really Matter

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<v Speaker 1>I'm Barry Ridults, and I'm excited to tell you about

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<v Speaker 1>my new podcast, At the Money. Each week, I'm going

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<v Speaker 1>to spend about ten minutes or so diving deep into

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<v Speaker 1>a specific topic that affects you and your money, acquiring it,

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<v Speaker 1>spending it, and most of all, investing it. We'll talk

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<v Speaker 1>about things like portfolio construction, why fees matter, how to

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<v Speaker 1>build a set of bond holdings, why it matters so

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<v Speaker 1>much to manage your own behavior as an investor. Strap

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<v Speaker 1>in for At the Money. Starting right now, we.

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<v Speaker 2>Are committed to lowering fees to an ETA. You're competing

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<v Speaker 2>against people that have two basis points fees. The margins

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<v Speaker 2>on ETF tend to be lower than mutual funds or

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<v Speaker 2>other types of products.

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<v Speaker 1>Are fun fees going to zero? The trend for ETF

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<v Speaker 1>prices have been lower fees. Now, after decades of falling price,

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

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<v Speaker 1>to help us unpack this. Eric Balcunis is senior ETF

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<v Speaker 1>analyst at Bloomberg Intelligence. As in writing about funds and

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<v Speaker 1>ETFs for years, Eric, what's going on here? Are fees

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<v Speaker 1>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 1>That's crazy.

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<v Speaker 2>It is crazy. It's a beautiful thing free, Yeah, it is.

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<v Speaker 2>It's I call it the great cost migration. I call

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

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<v Speaker 2>ETF industry the terodome, because it is brutal. If you're

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<v Speaker 2>an issuer, everybody's cutting fees all the time. But the

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<v Speaker 2>thing is it works. Cutting fees almost is like batting

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<v Speaker 2>one thousand, and if you do that, the flows 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.

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<v Speaker 2>Explain, Yeah, so if you say all the money that

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<v Speaker 2>went 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 age

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<v Speaker 2>asset weighted average is nine basis points, So that's a

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<v Speaker 2>huge savings. So that money moving over there, if it

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<v Speaker 2>weren't in Vanguard, we'll be paying sixty six instead of nine.

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

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<v Speaker 2>other half are people who copy them.

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<v Speaker 1>So lack Rock, State Street, Schwab.

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<v Speaker 2>Even JP, Morgan and Goldman now have Vanguard ESK in Fidelity.

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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 Bogel

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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 cent 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 it 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, 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 cold 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? Can it?

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<v Speaker 2>It does? So when Bogel was trying to sell the

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<v Speaker 2>index fund, everybody thought, oh, it's average. I don't want

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

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<v Speaker 2>an average doctor. It was hard to sell average to

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<v Speaker 2>the American public. We want winners. One chart he used

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<v Speaker 2>that was very compelling, and I tell everybody, look, go

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

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

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

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

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<v Speaker 2>you pay the active fund plus the turnover and trading costs.

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

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<v Speaker 2>fees you get something like three hundred and sixty thousand dollars.

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<v Speaker 2>The six percent compounding only gives you like one hundred

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<v Speaker 2>and seventy thousand.

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<v Speaker 1>Dollars, basically double.

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

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

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

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

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<v Speaker 2>the with the no fee, you get basically ninety eight

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<v Speaker 2>percent something like that of the total returns. Because remember

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<v Speaker 2>we're all here for one reason. Compounding returns the magic

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<v Speaker 2>of compounding, and as those returns compound, the lower the

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<v Speaker 2>fee is, the more that beautiful magic ends up in

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<v Speaker 2>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 fee 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 criteria for them and

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<v Speaker 2>picking an ETF. Number one is feet, Number two is brand.

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<v Speaker 2>That's why we tend to see the money going to

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<v Speaker 2>the big brands, let's say Vanguard, Blackrock definitely, but also

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<v Speaker 2>State Street, Invesco, Schwab. These brands plus a low fee irresistible.

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<v Speaker 2>But if you take a brand that's not known for this.

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<v Speaker 2>There was a company called Focus Shares back in the day.

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<v Speaker 2>They tried to undercut Nobody really cared because nobody knew

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<v Speaker 2>that brand, and it felt gimmicky. So that's why I

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<v Speaker 2>think the brand is also important here. It's not just

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<v Speaker 2>the low fee, it's the low fee plus the brand

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<v Speaker 2>that is almost like an irresistible value proposition for most people.

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<v Speaker 1>Let me throw a little bit of a curve ball

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<v Speaker 1>at you. We're talking about mutual funds and ETFs, but

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<v Speaker 1>the reality is that's twenty twenty five trillion dollars. There's

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<v Speaker 1>still another fifty trillion inequity and another I don't know,

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<v Speaker 1>seventy five trillion in bonds behind that. How significant are

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<v Speaker 1>ETFs and mutual 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 push 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>multitude 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 discreet. I now can buy

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<v Speaker 2>exactly the songs I want, or if you stream and

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<v Speaker 2>you can add this flexibility. It fits on your phone better,

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<v Speaker 2>compact disc harder to you know, lug them around. So

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<v Speaker 2>I think every industry goes through this. I would also

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<v Speaker 2>say an uber to the cab. That's another industry. Uber

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<v Speaker 2>uses the Internet. It's cleaner like some of there's always

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<v Speaker 2>these disruptive events, and so ETFs are big. But I

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<v Speaker 2>gotta say ETFs at eighty basis points wouldn't be a

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<v Speaker 2>big deal. They're only really popular in sweeping the country

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<v Speaker 2>because they're cheap, and you have to give Vanguard and

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<v Speaker 2>Bogel credit. That's where even though he didn't like ETFs,

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<v Speaker 2>he had this monumental impact on them. So to me,

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<v Speaker 2>whether it's an index mutual fund or an ETF, the

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<v Speaker 2>bigger trend is the great cost migration, and you got

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<v Speaker 2>to go back to Bogel on that. That said, when

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<v Speaker 2>it comes to getting investments in a low fee format,

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<v Speaker 2>I think the ETF vehicle is the 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>You can listen to At the Money every week, finding

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<v Speaker 1>in our Masters and business feed at Bloomberg dot com,

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<v Speaker 1>Apple Podcasts and Spotify. Each week we'll be here to

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<v Speaker 1>discuss the issues that matter most to you as an investor.

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<v Speaker 1>I'm Barry Ritolts, you've been listening to At the Money

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<v Speaker 1>on Bloomberg Radio.