January 13, 2013


Vanguard's $130 Billion Year (Roben Farzad, December 11, 2012, Business Week)

The $5 footlong. The $340 laptop. Free two-day shipping. All hallmarks of our economic times.

Vanguard, the 38-year-old low-cost investing pioneer, brings you the Great Deflation.

The fund company is not just having its best year ever. (It shattered that record in September.) The $130.4 billion in deposits in mutual funds and exchange-traded funds that Vanguard has taken in through November is the most ever for the industry, according to data from Strategic Insight. That beats the $129.6 billion that JPMorgan (JPM) clocked, mostly for money market funds, in 2008. This year's not over.

You've no doubt heard of the "Wal-Mart (WMT)effect." Now the market is watching--with equal parts gratitude and trepidation--the rapid escalation of the "Vanguard effect." It's asymmetric warfare, as Vanguard's sole ownership and constituency is its fundholders, the savings it wrings from its buying power are passed on to them, not to shareholders or partners. BlackRock (BLK), Charles Schwab (SCHW), Fidelity, and State Street cannot say the same.

"No one should be shocked," says Josh Brown, the Manhattan investment adviser who blogs as the Reformed Broker. He says that Vanguard is selling the lowest-cost bond funds in an environment in which every basis point counts, as well as "the plainest-vanilla indexes" in an era whose most expensive stock-pickers, he says, have been "rendered impotent."

The average equity mutual fund investor pays $1.24 for every $100 invested, compared with just under 36¢ for equity ETFs, according to Lipper. Vanguard ups (lowers?) that ante by offering a firm-wide average expense of 20¢ per $100 invested. 

Posted by at January 13, 2013 9:44 AM

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