Largest Expense Ratio Reduction in Vanguard’s History
Vanguard Group, one of the largest asset management firms in the world, announced this week that it has slashed fees on 168 mutual fund and ETF share classes across 87 funds, marking the largest annual expense ratio reduction in its nearly 50-year history.
The move lowers Vanguard’s average asset-weighted expense ratio to 0.07%, a fraction of the industry average of 0.44%. These cuts reaffirm Vanguard’s long-standing commitment to providing low-cost investment options and maximizing returns for its investors.
According to Daniel Sotiroff, senior research analyst at Morningstar, the reduction in fees is a positive development for investors, though the impact might be subtle given Vanguard’s already low-cost structure.
“Fee cuts are always a positive sign,” Sotiroff told Yahoo Finance. “The impact for Vanguard’s investors is positive, but it isn’t going to be huge, largely because its fees are already really low.”
Let’s break down what these changes mean for investors and why even small reductions in expense ratios can have a significant long-term impact on portfolio performance.
Key Vanguard Funds with Reduced Fees
Some of the major funds that received expense ratio cuts include:
- Russell 1000 Value ETF (VONV) – Reduced from 0.08% to 0.07%
- International High Dividend Yield ETF (VYMI) – Reduced from 0.22% to 0.17%
- Total Bond Market Index Fund (VBTLX) – Reduced from 0.05% to 0.04%
- Emerging Markets Government Bond ETF (VWOB) – Reduced from 0.20% to 0.15%
- Vanguard Dividend Appreciation ETF (VYM) – Reduced from 0.06% to 0.05%
Why Expense Ratio Reductions Matter
While a 0.01% or 0.05% fee reduction may seem insignificant, these small changes can have a meaningful impact over time, particularly for long-term investors.
A lower expense ratio means less money deducted from an investor’s returns, allowing more of their capital to remain invested and compounded over time. This aligns with the philosophy of Vanguard’s founder, Jack Bogle, who emphasized maximizing returns by minimizing costs.
“Vanguard’s fee cuts are a win for retail investors — you and me — helping to boost long-term returns,” said Mark Johnson, an investments and portfolio management professor at Wake Forest University.
Johnson further highlighted that in today’s market, expense ratios under 0.10% are considered low, making Vanguard’s latest fee reductions a notable competitive advantage for investors.
The Timing: Fee Cuts Following SEC Settlement
Vanguard’s decision to implement its largest-ever fee reduction comes just weeks after agreeing to pay $106 million in a settlement with the Securities and Exchange Commission (SEC).
The settlement was related to misleading statements about capital gains distributions and tax consequences for retail investors in Vanguard Investor Target Retirement Funds (Investor TRFs).
While the fee cuts may help restore investor confidence, Vanguard CEO Salim Ramji emphasized that the firm’s primary focus remains on delivering value to its investors.
“At Vanguard, we’re focused on creating value for our investors, not extracting value from them,” Ramji stated in a press release.
Will Competitors Follow Suit?
Vanguard’s aggressive expense ratio cuts could force other major asset management firms to consider similar reductions.
If competitors like BlackRock, Fidelity, and Schwab respond by lowering fees on their mutual funds and ETFs, investors could benefit from an industry-wide shift toward even lower-cost investing.
According to Morningstar’s Sotiroff, Vanguard’s decision to forgo an estimated $350 million in revenue this year due to the fee reductions is a clear sign that the firm is prioritizing long-term investor returns over short-term profits.
“It shows that Vanguard is willing to give up a pretty substantial amount of revenue this year, and in future years, for the betterment of its clients,” Sotiroff noted.
If history is any guide, fee wars in the asset management industry tend to intensify after major firms like Vanguard make significant pricing changes. This means investors may see even more cost-cutting across the board in the coming months.
What This Means for Your Investments
If you currently invest in Vanguard mutual funds or ETFs, these lower fees mean more of your money stays invested and compounds over time.
Here’s how Vanguard’s expense ratio reductions could impact investors:
✔ Higher Net Returns – Lower fees mean less drag on performance, allowing investors to keep more of their gains.
✔ Stronger Competitive Edge – Vanguard funds are already among the lowest-cost options in the market, and these reductions solidify that advantage.
✔ Potential Industry-Wide Fee Reductions – Competitors may feel pressure to match Vanguard’s pricing, leading to broader fee cuts across the market.
✔ Long-Term Investment Growth – Over decades, even a 0.10% difference in fees can translate into thousands of dollars in extra returns for investors.
Example of Cost Savings Over Time
Let’s say an investor places $100,000 into a Vanguard fund with an expense ratio of 0.07%, compared to a competitor’s fund with an expense ratio of 0.44%.
Assuming a 6% annual return over 30 years, here’s the difference in portfolio value:
- Vanguard Fund (0.07% fee) → $561,000
- Competitor’s Fund (0.44% fee) → $478,000
That’s an $83,000 difference in potential returns, purely due to Vanguard’s lower expense ratio.
The Future of Low-Cost Investing
Vanguard’s latest fee reductions signal a continued trend toward ultra-low-cost investing, benefitting retail investors who are focused on long-term wealth accumulation.
As expense ratios drop across the industry, investors should continue to prioritize cost-efficient investment options and consider how small differences in fees can have a big impact on their financial future.
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