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But how would you compete against the established companies? It cannot be higher returns, because all index-funds are supposed to have roughly the same returns
by w23j 9y ago
But how would you compete against the established companies? It cannot be higher returns, because all index-funds are supposed to have roughly the same returns (if they mirror the same index).
So it must be lower fees. And you are able to charge lower fees if the total amount of money you manage is big. (Because a tiny percentage of a huge sum will still cover your costs.) The established players already manage a few trillion dollars, so it is hard to compete against them in this area.
- Vinalin 9y agoAbsolutely correct. Also, in the case of Vanguard, they're known as an "At-Cost" company. This means that they take no profit from the investors, and instead will return any excess money in the form of higher returns. This makes it very difficult to operate a profitable business in this space.
- Jonnax 9y agoHow does their business model work then? Subscription fees?
- dx034 9y agoThey're essentially not-for-profit. So no business model other than serving clients and covering costs.
- Mindless2112 9y agoVanguard is structured as a mutual company; it is owned by funds managed by the company, and is therefore owned by its customers. [1] So its owners have no incentive to increase fees in order to increase profits. Actually, Vanguard has been sued over this [2][3] -- the claim essentially being that Vanguard ought to owe taxes on those profits that it didn't earn from fees that it didn't charge. [1] https://en.wikipedia.org/wiki/The_Vanguard_Group https://en.wikipedia.org/wiki/The_Vanguard_Group [2] https://www.nytimes.com/2016/02/07/your-money/vanguard-a-champion-of-low-fees-faces-a-peculiar-tax-challenge.html?mcubz=0 https://www.nytimes.com/2016/02/07/your-money/vanguard-a-cha... [3] https://news.ycombinator.com/item?id=11081550 https://news.ycombinator.com/item?id=11081550
- cat199 9y agoAny insight on why every other mutual fund company can't just offer index funds 'at cost' in addition to their normal portfolio? Seems like that would still be beneficial from a business perspective somehow, although one would probably need to be well versed in banking/finance/securities laws to figure out how to make it so..
- w23j 9y agoThey already do: "The loss leaders of the investment world" [1] Their theory? You'll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice. [1] http://www.reuters.com/article/us-column-stern-advice-idUSKCN0JA1AB20141126 http://www.reuters.com/article/us-column-stern-advice-idUSKC...