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The whole article is premised on the idea that Vanguard's fee is low at 0.17%. But is it really? In a free competitive market fees for algorithmic or mechanical

by guelo 12y ago

The whole article is premised on the idea that Vanguard's fee is low at 0.17%. But is it really? In a free competitive market fees for algorithmic or mechanical money management would probably be a small flat fee. Vanguard's costs are not proportional to the amount of money under management.

toomuchtodo 12y ago
Not sure why you were downvoted, it's true. A market competitor hasn't come out yet with a flat fee structure, but with the FinTech battle heating up between algorithmic advisors I believe its an inevitable product/price offering. A billion dollars buys a lot of developer and data scientist time.
- infinii 12y ago
  Not only that but does it really take double the effort for an invement manager to manage $100B compared to $50B?
  - toomuchtodo 12y ago
    Investment managers almost never beat an index: http://www.marketwatch.com/story/index-funds-beat-active-90-of-the-time-really-2014-08-01 http://www.marketwatch.com/story/index-funds-beat-active-90-... http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-10-25 http://www.marketwatch.com/story/almost-no-one-can-beat-the-... http://www.theglobeandmail.com/globe-investor/investment-ideas/actively-managed-funds-vs-the-index-once-again-no-contest/article21580578/ http://www.theglobeandmail.com/globe-investor/investment-ide...
    - lionhearted 12y ago
      A couple problems with that -- 1. Studies that say "XX% of active managers don't beat an index" include every tiny poorly managed fund. The best attractive lots of capital; Bridgewater has $169 billion under management and has a long track record of large outperformance. 2. A lot of investors aren't trying to beat the market per se -- that's in your own link. If you own safe investments during a bull market, you underperform... but if it (ideally) makes you less susceptible to both boom and bust, that could be a good trade depending on what you're doing. If you're an insurance company or pension fund, you probably want stability more than squeezing every last basis point out of your investments. Anyway, I could give you many criticisms of many aspects of finance, but I think "index > active management" is a bit simple.
      - mehwoot 12y ago
        1. Studies that say "XX% of active managers don't beat an index" include every tiny poorly managed fund. The best attractive lots of capital; Bridgewater has $169 billion under management and has a long track record of large outperformance. The second study linked found Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, “statistically indistinguishable from zero,” the three researchers concluded. So your cavets, whilst valid, I don't think go anywhere near disputing the central point.
      - SonicSoul 12y ago
        these are great points. I'd love to hear more of your criticisms
  - oh_sigh 12y ago
    No, but you may not be able to find a quality manager to manage the investment for a flat fee
    - GauntletWizard 12y ago
      Sure you can. It's just that that flat fee is going to represent .5% of your investment or more.
    - saryant 12y ago
      With an index fund you don't need one, you're just tracking the indices published by S&P/Barclays/etc.
  - oh_sigh 12y ago
    No, but you may not be able to find a quality manager to manage the investment for a flat fee
jcdavis 12y ago
The 0.17% is only for the "investor class" shares, which starts at 3k. Invest 10k and you get "admiral class" shares which charge only 0.05%. At $5m you can get "institutional "which only charges 0.04%, and at $200m you can get "institutional plus" that charges 0.02%, which any big pension fund could have
- obstinate 12y ago
  That's really interesting. So you could put $200M of assets into a Vanguard fund and only get charged $40k/y for that. It seems like a very small number when you put it that way.
  - alextgordon 12y ago
    Which begs the question, how are they really making their money?
    - cmdkeen 12y ago
      Because they have $3 trillion in assets under management - which is $600m a year even at 2 basis points in fees, which not everyone pays. Economies of scale ramp up quickly.
      - pbhjpbhj 12y ago
        With that sort of weight of assets surely they can push the market around enough to gain no matter where prices move?
        asr 12y ago
        The opposite, actually. With those sorts of assets you have to start getting worried about algorithms front-running your trades and things like that. Also, "the market" is big.
        Lazare 12y ago
        I see you're getting downvoted, but no one is bothering to explain. First, the market in general works in the exact opposite way. You can invest a million dollars a lot of places; with enough luck and skill you'll earn a great return. Keep doing that and soon you'll have, say, 500 million. But 500 million is harder to invest; you might say "stock X is really undervalued; I'm going to go long!", but if stock X has a market cap of 10 billion, you'll struggle to find 500 million in shares to purchase on a whim, and in so doing, you'll push the price up, and now it's no longer undervalued. Many investments that work for the guy with 1m don't work for the guy with 500m. But if you keep going and keep being lucky (or skilled) you might end up with billions or hundreds of billions. Now you're basically fucked. Most possible investments don't have the liquidity or capacity to absorb the money you're trying to place. At this scale you aren't picking companies; you're picking industrial sectors or countries. You'll never make a great return like that. Plus you're being watched constantly; the merest rumour that you're about to invest will end prices soaring or crashing before you can move. You can "push the market around", but only in ways that benefit smaller, nimble players, not you. At that scale, your ability to be clever is basically nil. Which brings us to the second point: Vanguard is an index fund. They simply buy an even mix of the shares that make up an index. Their entire strategy/promise is that they won't "push the market around" (which is the reason they have $3t under management; people explicitly looking for people who won't try and be clever). So your question is "couldn't Vanguard do the one thing they don't do, because it can't work"? And the answer is no, it can't work, which is why Vanguard exists and has those assets.
hackercurious 12y ago
The Vanguard S&P 500 ETF (VOO) has Expense ratio of Expense ratio 0.05%. - this ETF is nearly identical to a mutual fund and it can be traded on the exchange.
jackgavigan 12y ago
> In a free competitive market fees for algorithmic or mechanical money management would... In what way is the market not free and competitive?
daniel_solano 12y ago
It's not so much that you are paying only for algorithmic/mechanical money management, but there are transaction costs as well. For example, an fund that tracks a particular index will need to buy/sell as the composition of the index changes. Even without that, you still have contributions and redemptions to deal with. Ideally, you try to match redemptions with contributions dollar for dollar, but they won't always match up, resulting purchasing or selling stock (which incurs transaction fees). Of course, there's the administrative overhead of managing a fund (keeping records, filing reports, etc.). As such, you aren't just paying for the algorithm.

by guelo 12y ago

toomuchtodo 12y ago

Not sure why you were downvoted, it's true. A market competitor hasn't come out yet with a flat fee structure, but with the FinTech battle heating up between algorithmic advisors I believe its an inevitable product/price offering. A billion dollars buys a lot of developer and data scientist time.

infinii 12y ago
Not only that but does it really take double the effort for an invement manager to manage $100B compared to $50B?
- toomuchtodo 12y ago
  Investment managers almost never beat an index: http://www.marketwatch.com/story/index-funds-beat-active-90-of-the-time-really-2014-08-01 http://www.marketwatch.com/story/index-funds-beat-active-90-... http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-10-25 http://www.marketwatch.com/story/almost-no-one-can-beat-the-... http://www.theglobeandmail.com/globe-investor/investment-ideas/actively-managed-funds-vs-the-index-once-again-no-contest/article21580578/ http://www.theglobeandmail.com/globe-investor/investment-ide...
  - lionhearted 12y ago
    A couple problems with that -- 1. Studies that say "XX% of active managers don't beat an index" include every tiny poorly managed fund. The best attractive lots of capital; Bridgewater has $169 billion under management and has a long track record of large outperformance. 2. A lot of investors aren't trying to beat the market per se -- that's in your own link. If you own safe investments during a bull market, you underperform... but if it (ideally) makes you less susceptible to both boom and bust, that could be a good trade depending on what you're doing. If you're an insurance company or pension fund, you probably want stability more than squeezing every last basis point out of your investments. Anyway, I could give you many criticisms of many aspects of finance, but I think "index > active management" is a bit simple.
    - mehwoot 12y ago
      1. Studies that say "XX% of active managers don't beat an index" include every tiny poorly managed fund. The best attractive lots of capital; Bridgewater has $169 billion under management and has a long track record of large outperformance. The second study linked found Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, “statistically indistinguishable from zero,” the three researchers concluded. So your cavets, whilst valid, I don't think go anywhere near disputing the central point.
    - SonicSoul 12y ago
      these are great points. I'd love to hear more of your criticisms
- oh_sigh 12y ago
  No, but you may not be able to find a quality manager to manage the investment for a flat fee
  - GauntletWizard 12y ago
    Sure you can. It's just that that flat fee is going to represent .5% of your investment or more.
  - saryant 12y ago
    With an index fund you don't need one, you're just tracking the indices published by S&P/Barclays/etc.
- oh_sigh 12y ago
  No, but you may not be able to find a quality manager to manage the investment for a flat fee

jcdavis 12y ago

The 0.17% is only for the "investor class" shares, which starts at 3k. Invest 10k and you get "admiral class" shares which charge only 0.05%. At $5m you can get "institutional "which only charges 0.04%, and at $200m you can get "institutional plus" that charges 0.02%, which any big pension fund could have

obstinate 12y ago
That's really interesting. So you could put $200M of assets into a Vanguard fund and only get charged $40k/y for that. It seems like a very small number when you put it that way.
- alextgordon 12y ago
  Which begs the question, how are they really making their money?
  - cmdkeen 12y ago
    Because they have $3 trillion in assets under management - which is $600m a year even at 2 basis points in fees, which not everyone pays. Economies of scale ramp up quickly.
    - pbhjpbhj 12y ago
      With that sort of weight of assets surely they can push the market around enough to gain no matter where prices move?
      - asr 12y ago
        The opposite, actually. With those sorts of assets you have to start getting worried about algorithms front-running your trades and things like that. Also, "the market" is big.
      - Lazare 12y ago
        I see you're getting downvoted, but no one is bothering to explain. First, the market in general works in the exact opposite way. You can invest a million dollars a lot of places; with enough luck and skill you'll earn a great return. Keep doing that and soon you'll have, say, 500 million. But 500 million is harder to invest; you might say "stock X is really undervalued; I'm going to go long!", but if stock X has a market cap of 10 billion, you'll struggle to find 500 million in shares to purchase on a whim, and in so doing, you'll push the price up, and now it's no longer undervalued. Many investments that work for the guy with 1m don't work for the guy with 500m. But if you keep going and keep being lucky (or skilled) you might end up with billions or hundreds of billions. Now you're basically fucked. Most possible investments don't have the liquidity or capacity to absorb the money you're trying to place. At this scale you aren't picking companies; you're picking industrial sectors or countries. You'll never make a great return like that. Plus you're being watched constantly; the merest rumour that you're about to invest will end prices soaring or crashing before you can move. You can "push the market around", but only in ways that benefit smaller, nimble players, not you. At that scale, your ability to be clever is basically nil. Which brings us to the second point: Vanguard is an index fund. They simply buy an even mix of the shares that make up an index. Their entire strategy/promise is that they won't "push the market around" (which is the reason they have $3t under management; people explicitly looking for people who won't try and be clever). So your question is "couldn't Vanguard do the one thing they don't do, because it can't work"? And the answer is no, it can't work, which is why Vanguard exists and has those assets.

hackercurious 12y ago

The Vanguard S&P 500 ETF (VOO) has Expense ratio of Expense ratio 0.05%. - this ETF is nearly identical to a mutual fund and it can be traded on the exchange.

jackgavigan 12y ago

> In a free competitive market fees for algorithmic or mechanical money management would... In what way is the market not free and competitive?

daniel_solano 12y ago

It's not so much that you are paying only for algorithmic/mechanical money management, but there are transaction costs as well. For example, an fund that tracks a particular index will need to buy/sell as the composition of the index changes. Even without that, you still have contributions and redemptions to deal with. Ideally, you try to match redemptions with contributions dollar for dollar, but they won't always match up, resulting purchasing or selling stock (which incurs transaction fees). Of course, there's the administrative overhead of managing a fund (keeping records, filing reports, etc.). As such, you aren't just paying for the algorithm.