WSJ-- Next Stop for Mutual-Fund Fees: Zero

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Paul Romano
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WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by Paul Romano » Mon Jun 11, 2018 9:47 am

WSJ- June 10

"Next Stop for Mutual-Fund Fees: Zero
That could mean tens of thousands in extra savings for investors in retirement."

https://www.wsj.com/articles/next-stop- ... 652532[url][/url]

How much is a mutual-fund adviser’s advice really worth?

How about nothing?

Since 2000 the average annual mutual-fund fee has fallen by more than a third. For funds that track a stock index, the average fee is now less than 0.1%, but even that is too high. That fraction of a percentage point means real money over time. If you invest $10,000 in a mutual fund today, and the stock market rises 6% a year, a 0.09% expense ratio will cost you more than $1,500 over three decades.

The industry has begun to realize this isn’t sustainable. In April Fidelity Investments launched its first-ever free index funds—that is, funds with a stated expense ratio of zero. The new funds, part of the firm’s Flex suite, will be available only to select Fidelity clients, but other mutual-fund advisers will likely emulate the model.

Four factors should facilitate the wider distribution of zero-cost mutual funds in the near future.

Third, mutual funds are increasingly finding that they can generate income from nonfee sources. In fiscal 2017, the Vanguard Total Stock Market Index Fund earned more than 63% of its expenses by lending securities. The demand for securities loans has limits, but growth in that market will allow an increasing number of funds to offset some or all of their expenses through loan income. Wise financial institutions will realize that offering a free mutual fund can attract customers to whom they can cross-sell other products, like life insurance and annuities.

If the notion of a free mutual fund seems exotic, consider that for centuries banks have paid investors to manage their money. That is what we call “interest.” While interest rates on bank accounts have fallen dramatically in recent decades, perhaps mutual funds of the future, like banks of the past, will pay us to hold our savings. Meanwhile, eliminating fees seems like a worthwhile goal—and one that now appears within reach.

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JoMoney
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by JoMoney » Mon Jun 11, 2018 10:19 am

Here's archived version of article:
http://archive.is/4UDpQ
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by rgs92 » Mon Jun 11, 2018 10:27 am

I don't think going from 3 basis points to none is going to make a difference to anyone. It's just psychological. It may attract some headlines.
(ETFs from iShares and Schwab have this 3 basis point charge already.)

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by livesoft » Mon Jun 11, 2018 10:37 am

Nevertheless, it probably costs Vanguard money to have Investor, Admiral, and Institutional shares. If Vanguard had just one share class: Free, then think of all the documents they could dispense with and all the extra stuff on their web sites. No duplication of effort.
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by Broken Man 1999 » Mon Jun 11, 2018 10:40 am

rgs92 wrote:
Mon Jun 11, 2018 10:27 am
I don't think going from 3 basis points to none is going to make a difference to anyone. It's just psychological. It may attract some headlines.
(ETFs from iShares and Schwab have this 3 basis point charge already.)
Yeah, I'm with you. I have occasionally calculated our total investing expense, and even accounting for the higher ERs in our Vanguard variable annuity, the grand sum total is ridiculously low. I get some help as part of our bond holdings are in US Savings Bonds, with zero expense.

Hey, I applaud Vanguard's efforts to cut expenses (realizing some investors need/want additional/better services); truthfully, I'm fine where we are today.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by alfaspider » Mon Jun 11, 2018 10:41 am

rgs92 wrote:
Mon Jun 11, 2018 10:27 am
I don't think going from 3 basis points to none is going to make a difference to anyone. It's just psychological. It may attract some headlines.
(ETFs from iShares and Schwab have this 3 basis point charge already.)
Yep. The difference between .04% and zero is really pretty minuscule. The article shows that a .09% ER fund (more than double VTI) will cost $1,500 over 30 years, but it should be pointed out that at the same growth rate, that fund would also grow by over $47,000. Fees make a BIG difference when you are talking about 1.5% AUMs and 5% loads. When you are talking about .04% vs .03% ERs, they become noise.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by djpeteski » Mon Jun 11, 2018 10:46 am

From the Fidelity Flex 500 Index Fund page:
Shares are available only to certain fee-based accounts offered by Fidelity.
Okay, you can get free mutual funds if you pay for our advisory services.

I would rather have a 0.035% (FUSVX) rather than 0% on FDFIX and at least 1% on my entire portfolio.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by triceratop » Mon Jun 11, 2018 11:56 am

Loved this bit, I didn't know the licensing fees were that high (and not fixed cost!):
A fund need not explicitly track the S&P 500 to offer investors diversified exposure to large-cap U.S. equities, and decoupling a fund from a name-brand index can cut costs. The SPDR S&P 500 ETF , the largest fund tracking the S&P 500, pays three basis points for the right to use the S&P 500 name.
It's encouraging to see Vanguard preferring its CRSP-funds (e.g. phasing out SP500 funds in its own retirement plans); it's likely that Vanguard is looking ahead.
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by JoMoney » Mon Jun 11, 2018 12:10 pm

triceratop wrote:
Mon Jun 11, 2018 11:56 am
...
It's encouraging to see Vanguard preferring its CRSP-funds (e.g. phasing out SP500 funds in its own retirement plans); it's likely that Vanguard is looking ahead.
Why is lack of choice "encouraging" ?
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by triceratop » Mon Jun 11, 2018 12:29 pm

JoMoney wrote:
Mon Jun 11, 2018 12:10 pm
triceratop wrote:
Mon Jun 11, 2018 11:56 am
...
It's encouraging to see Vanguard preferring its CRSP-funds (e.g. phasing out SP500 funds in its own retirement plans); it's likely that Vanguard is looking ahead.
Why is lack of choice "encouraging" ?
I didn't say lack of choice is what makes it encouraging, I think you can recognize that. Rather, it is encouraging because of the potential for lower fees, with higher diversification.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by JoMoney » Mon Jun 11, 2018 12:39 pm

triceratop wrote:
Mon Jun 11, 2018 12:29 pm
JoMoney wrote:
Mon Jun 11, 2018 12:10 pm
triceratop wrote:
Mon Jun 11, 2018 11:56 am
...
It's encouraging to see Vanguard preferring its CRSP-funds (e.g. phasing out SP500 funds in its own retirement plans); it's likely that Vanguard is looking ahead.
Why is lack of choice "encouraging" ?
I didn't say lack of choice is what makes it encouraging, I think you can recognize that. Rather, it is encouraging because of the potential for lower fees, with higher diversification.
One mans "diversification" is anothers risky junk they don't want to own.
Maybe they should lower the cost of the S&P fund by tossing out the TSM, and let those who want the "diversification" buy a completion index.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by triceratop » Mon Jun 11, 2018 1:06 pm

JoMoney wrote:
Mon Jun 11, 2018 12:39 pm
One mans "diversification" is anothers risky junk they don't want to own.
Maybe they should lower the cost of the S&P fund by tossing out the TSM, and let those who want the "diversification" buy a completion index.
But....the S&P index is more expensive than the CRSP index..? I don't see how your idea makes mathematical sense. So, how would using the S&P fund lower costs? The WSJ article stated the licensing fee is %AUM not fixed-cost so growing the size of the fund doesn't help in this respect.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by JoMoney » Mon Jun 11, 2018 1:17 pm

triceratop wrote:
Mon Jun 11, 2018 1:06 pm
JoMoney wrote:
Mon Jun 11, 2018 12:39 pm
One mans "diversification" is anothers risky junk they don't want to own.
Maybe they should lower the cost of the S&P fund by tossing out the TSM, and let those who want the "diversification" buy a completion index.
But....the S&P index is more expensive than the CRSP index..? I don't see how your idea makes mathematical sense. So, how would using the S&P fund lower costs? The WSJ article stated the licensing fee is %AUM not fixed-cost so growing the size of the fund doesn't help in this respect.
*shrug* We know that the SPY ETF is paying more than others, but I don't think we know what the licensing arrangement is for Vanguard's use of the 500 or others. Clearly Vanguard's Institutional Index fund (and other institutional CITs out there) aren't paying that much, VIIIX has an ER of .02% , I have a CIT in my 401k at .01% ... there was an article long time back when Vanguard was introducing there VOO ETF about a dispute they had with S&P over being able to use their prior licensing arrangement from the fund for the ETF class ... I'll have to search and see if there were any details in there.
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by triceratop » Mon Jun 11, 2018 1:22 pm

JoMoney wrote:
Mon Jun 11, 2018 1:17 pm
triceratop wrote:
Mon Jun 11, 2018 1:06 pm
JoMoney wrote:
Mon Jun 11, 2018 12:39 pm
One mans "diversification" is anothers risky junk they don't want to own.
Maybe they should lower the cost of the S&P fund by tossing out the TSM, and let those who want the "diversification" buy a completion index.
But....the S&P index is more expensive than the CRSP index..? I don't see how your idea makes mathematical sense. So, how would using the S&P fund lower costs? The WSJ article stated the licensing fee is %AUM not fixed-cost so growing the size of the fund doesn't help in this respect.
*shrug* We know that the SPY ETF is paying more than others, but I don't think we know what the licensing arrangement is for Vanguard's use of the 500 or others. Clearly Vanguard's Institutional Index fund (and other institutional CITs out there) aren't paying that much, VIIIX has an ER of .02% , I have a CIT in my 401k at .01% ... there was an article long time back when Vanguard was introducing there VOO ETF about a dispute they had with S&P over being able to use their prior licensing arrangement from the fund for the ETF class ... I'll have to search and see if there were any details in there.
Totally fair point. I still suspect (well, we know) that CRSP indices are lower cost (and more diversified, even if you feel that it its just junk stocks), which is my real point here regardless of the size of the fee difference.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by alex_686 » Mon Jun 11, 2018 1:23 pm

triceratop wrote:
Mon Jun 11, 2018 1:06 pm
But....the S&P index is more expensive than the CRSP index..? I don't see how your idea makes mathematical sense. So, how would using the S&P fund lower costs? The WSJ article stated the licensing fee is %AUM not fixed-cost so growing the size of the fund doesn't help in this respect.
One big fee is the licensing fee to use the index. Why would S&P cut their fee for using their index? The general consensus is that Vanguard hired CRSP to create a index that they could license for cheap. I don't think any other funds use the CRSP index.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by triceratop » Mon Jun 11, 2018 1:24 pm

alex_686 wrote:
Mon Jun 11, 2018 1:23 pm
triceratop wrote:
Mon Jun 11, 2018 1:06 pm
But....the S&P index is more expensive than the CRSP index..? I don't see how your idea makes mathematical sense. So, how would using the S&P fund lower costs? The WSJ article stated the licensing fee is %AUM not fixed-cost so growing the size of the fund doesn't help in this respect.
One big fee is the licensing fee to use the index. Why would S&P cut their fee for using their index? The general consensus is that Vanguard hired CRSP to create a index that they could license for cheap. I don't think any other funds use the CRSP index.
Correct. I think we're in agreement as I was talking about the S&P fund (which does want to reduce fees), but maybe I misread your post.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by JoMoney » Mon Jun 11, 2018 1:30 pm

From what this article claims "reportedly", Vanguard might have negotiated a fixed price fee way way back for their use of the S&P 500
https://www.fool.com/investing/2017/06/ ... s-mak.aspx
...But then Vanguard overstepped the boundaries of its agreement. The fund company pushed forward to create ETFs based on S&P indexes with the presumption that its perpetual license would extend to ETFs, too. S&P didn't see eye to eye with Vanguard, and the two landed in court, where Vanguard ultimately lost. To this day, Vanguard's premier S&P 500 index fund is reportedly operating under its perpetual license, paying just $50,000 per year to S&P Global, but subsequent funds based on S&P's indexes are likely paying full freight...
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by alex_686 » Mon Jun 11, 2018 1:31 pm

triceratop wrote:
Mon Jun 11, 2018 1:24 pm
Correct. I think we're in agreement as I was talking about the S&P fund (which does want to reduce fees), but maybe I misread your post.
I think your question mark threw me. I know a thing or two about index licensing fee, plus I don't click on WSJ articles because they are behind paywalls.

To extend a little bit, I don't know how much lower expense ratios can go, or how low we want them to go. Operations is more or less a fixed cost. Web and electronic documents push costs down, the ever proliferating SEC rules push costs up. Plus there is a trade off between explicate expenses and implicit expenses. One can buy a cheap automated trading system to lower expenses in exchange for poorer execution. The first shows up as a expense, the second does not.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by JoMoney » Mon Jun 11, 2018 1:40 pm

alex_686 wrote:
Mon Jun 11, 2018 1:31 pm
...One can buy a cheap automated trading system to lower expenses in exchange for poorer execution. The first shows up as a expense, the second does not.
Yes, and there are indications/suspicions that some mutual funds might actually do something like that, or make arrangements with brokers to sell their funds with "no load" in exchange for the broker being the primary trade executor at costs that are less transparent... Mutual funds can do some pretty shady things that are clouded... one of the advantages of an index fund specifically though, is that you can verify how well your fund actually tracks its index.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by FIREchief » Mon Jun 11, 2018 2:05 pm

rgs92 wrote:
Mon Jun 11, 2018 10:27 am
I don't think going from 3 basis points to none is going to make a difference to anyone. It's just psychological. It may attract some headlines.
(ETFs from iShares and Schwab have this 3 basis point charge already.)
I'm going to disagree with this. Somebody with a million in a fund with .035% ER would save $350 per year in expenses, which would remain in the account as additional earnings, compounding over the decades. A person with 3 million would save over $1000 per year. That's more than psychological. That's cold hard cash. Since when does a Boglehead consider $1000 "just psychological?"
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by Broken Man 1999 » Mon Jun 11, 2018 2:28 pm

From OP's original link:
......Third, mutual funds are increasingly finding that they can generate income from nonfee sources. In fiscal 2017, the Vanguard Total Stock Market Index Fund earned more than 63% of its expenses by lending securities....


That is pretty darn amazing to read, at least for me. :shock:
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by MrPotatoHead » Mon Jun 11, 2018 2:40 pm

I guess it is a mindset. Consider if I have a 3 million dollar equity portfolio. Even if the overall expense ratio is .03% it is a chunk of money to me.

I invest to generate a cashflow I can live off of in retirement. So I ultimately expense ratios are an expense against the cashflow/return/yield of the investment as I am not aiming for graceful liquidation my principle.

What I consider a safe withdraw rate is 1.6%, ergo, 48,000 a year on 3 million. That .03% ER is $900 a year or 1.85% of what I take out of it. So the croupier rakes in almost 2% off my investments even with a .03% ER.

As I said, it is how you view it.
Last edited by MrPotatoHead on Mon Jun 11, 2018 7:36 pm, edited 2 times in total.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by JoMoney » Mon Jun 11, 2018 2:42 pm

Broken Man 1999 wrote:
Mon Jun 11, 2018 2:28 pm
From OP's original link:
......Third, mutual funds are increasingly finding that they can generate income from nonfee sources. In fiscal 2017, the Vanguard Total Stock Market Index Fund earned more than 63% of its expenses by lending securities....


That is pretty darn amazing to read, at least for me. :shock:
If you look at the last 3 years, [Growth Chart Link] and do the math, Vanguard's fund was only -.01% annualized from its index. You would expect at least -.04% given the current ER.
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by JustinR » Mon Jun 11, 2018 2:45 pm

Why are there Bogleheads here saying they don't mind it not being 0? :shock:

If the difference between what it is now and zero is "miniscule" or "noise," then why not just have it be zero?

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by Nate79 » Mon Jun 11, 2018 3:55 pm

I think it is a little bit disingenuous to say that these mutual funds have zero fees. Certainly if the funds are able to offset the costs in the fund with revenue it doesn't mean that there were zero fees. If there were actually zero fees then you would have a positive return vs the index due to the revenue generated. I understand that the article says that it is referring to a potential zero ER but that is not the same as no fees.

VTSAX fund and it's family (VTI/VTSMX) had a total of $320,589,000 in total expenses for 2017. It had $109,770,000 in securities lending revenue. The fund has $662,577,171,000 in total assets.

So even though the ER shows extremely low the funds are so big that it somewhat masks the actual huge level of expenses that are needed to run these massive mutual funds.

$320 million in expenses.

As a comparison the Vanguard S&P500 fund had a total of $151 million in expenses and only $4.2 million in lending revenue on a total asset value of $391 billion. As a fraction of total asset value that is far far lower than VTSAX lending revenue.

The ability to have lending revenue is highly dependent on the makeup of the fund and is not a universal truth that there is a capability for all funds to have so much lending revenue that they can get to zero net cost.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by whodidntante » Mon Jun 11, 2018 4:29 pm

JustinR wrote:
Mon Jun 11, 2018 2:45 pm
Why are there Bogleheads here saying they don't mind it not being 0? :shock:

If the difference between what it is now and zero is "miniscule" or "noise," then why not just have it be zero?
Vanguard is pure and trustworthy and we own them, and they charge something. It is therefore fit and proper to charge something. We must be vigilant of shell games from Fidelity and BlackRock which we do not own. They are going to raise ERs on all their index funds once we are locked in via capital gains. Shenanigans! Shenanigans!

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by Broken Man 1999 » Mon Jun 11, 2018 4:52 pm

JustinR wrote:
Mon Jun 11, 2018 2:45 pm
Why are there Bogleheads here saying they don't mind it not being 0? :shock:

If the difference between what it is now and zero is "miniscule" or "noise," then why not just have it be zero?
I don't mind Vanguard's efforts, and I would most likely be happy even if I could get my services for zero costs at another firm.

I trust Vanguard, and, frankly I'm willing to pay extra, if it were necessary.

However, I'm sure Vanguard will find their way to lower and lower ERs just as other firms will be doing.

At this stage of our life, I'm not going to seek every penny possible, it just doesn't matter that much to me. Too many other opportunities to cut costs if I want to in other areas.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by CppCoder » Mon Jun 11, 2018 5:24 pm

JustinR wrote:
Mon Jun 11, 2018 2:45 pm
Why are there Bogleheads here saying they don't mind it not being 0? :shock:

If the difference between what it is now and zero is "miniscule" or "noise," then why not just have it be zero?
For me, it's because reasonable customer service and reliable IT have real costs. I'd rather not scrimp on some things.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by willthrill81 » Mon Jun 11, 2018 5:26 pm

The ER on the S&P 500 index fund in my 457 plan is .003%. That rounds to zero. :P
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by talzara » Mon Jun 11, 2018 6:48 pm

JoMoney wrote:
Mon Jun 11, 2018 1:30 pm
From what this article claims "reportedly", Vanguard might have negotiated a fixed price fee way way back for their use of the S&P 500
It was reported in this Marketwatch article from 2003:
Vanguard wanted to introduce its own form of exchange-traded fund, or ETF, known as a VIPER, or Vanguard Index Participation Equity Receipt, tracking the S&P 500. S&P wanted a licensing fee that Vanguard didn't want to pay. Vanguard lost the battle.

...

The one exception to this purge is the 500 Index Fund which Vanguard has no plans to change. Despite the love lost with S&P, Vanguard recognizes the marketing appeal of this $73 billion fund, which takes in some $130 million in operating fees each year and for which it pays just $50,000 per year in licensing fees.

https://www.marketwatch.com/story/more- ... ts-the-eye

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by FIREchief » Mon Jun 11, 2018 10:50 pm

whodidntante wrote:
Mon Jun 11, 2018 4:29 pm
We must be vigilant of shell games from Fidelity and BlackRock which we do not own. They are going to raise ERs on all their index funds once we are locked in via capital gains. Shenanigans! Shenanigans!
How's that going to work for those with most/all of their mutual fund assets in retirement accounts? Not much of a shell game.... :P
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by willthrill81 » Mon Jun 11, 2018 10:55 pm

FIREchief wrote:
Mon Jun 11, 2018 10:50 pm
whodidntante wrote:
Mon Jun 11, 2018 4:29 pm
We must be vigilant of shell games from Fidelity and BlackRock which we do not own. They are going to raise ERs on all their index funds once we are locked in via capital gains. Shenanigans! Shenanigans!
How's that going to work for those with most/all of their mutual fund assets in retirement accounts? Not much of a shell game.... :P
I'm pretty sure he was being sarcastic. But yes, those of us with no taxable accounts don't have to worry about those annoying capital gains and their consequences.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by FIREchief » Mon Jun 11, 2018 11:51 pm

willthrill81 wrote:
Mon Jun 11, 2018 10:55 pm
FIREchief wrote:
Mon Jun 11, 2018 10:50 pm
whodidntante wrote:
Mon Jun 11, 2018 4:29 pm
We must be vigilant of shell games from Fidelity and BlackRock which we do not own. They are going to raise ERs on all their index funds once we are locked in via capital gains. Shenanigans! Shenanigans!
How's that going to work for those with most/all of their mutual fund assets in retirement accounts? Not much of a shell game.... :P
I'm pretty sure he was being sarcastic.
Yeah, that's what I thought as well. 8-)
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by venkman » Tue Jun 12, 2018 12:47 am

FIREchief wrote:
Mon Jun 11, 2018 2:05 pm
I'm going to disagree with this. Somebody with a million in a fund with .035% ER would save $350 per year in expenses, which would remain in the account as additional earnings, compounding over the decades. A person with 3 million would save over $1000 per year. That's more than psychological. That's cold hard cash. Since when does a Boglehead consider $1000 "just psychological?"
A person with 3 million dollars invested in VTSAX made $3,300 today (up .11%), when the market was essentially flat. The underlying securities they owned gained over $10k during the course of the day, before dropping back down. That's just one, not-very-volatile day.

I don't disagree with the sentiment that paying nothing in fees is better than paying something in fees; but the choice of which day to make a transaction will likely affect your return far more than 0.035%.

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FIREchief
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by FIREchief » Tue Jun 12, 2018 1:14 am

venkman wrote:
Tue Jun 12, 2018 12:47 am
FIREchief wrote:
Mon Jun 11, 2018 2:05 pm
I'm going to disagree with this. Somebody with a million in a fund with .035% ER would save $350 per year in expenses, which would remain in the account as additional earnings, compounding over the decades. A person with 3 million would save over $1000 per year. That's more than psychological. That's cold hard cash. Since when does a Boglehead consider $1000 "just psychological?"
A person with 3 million dollars invested in VTSAX made $3,300 today (up .11%), when the market was essentially flat. The underlying securities they owned gained over $10k during the course of the day, before dropping back down. That's just one, not-very-volatile day.

I don't disagree with the sentiment that paying nothing in fees is better than paying something in fees; but the choice of which day to make a transaction will likely affect your return far more than 0.035%.
Transactions?? I’m buy and hold. I don’t need no stinken’ transactions.

The fee savings are guaranteed regardless of any other factors.
Last edited by FIREchief on Tue Jun 12, 2018 1:30 am, edited 1 time in total.
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venkman
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by venkman » Tue Jun 12, 2018 1:23 am

FIREchief wrote:
Tue Jun 12, 2018 1:14 am
venkman wrote:
Tue Jun 12, 2018 12:47 am
I don't disagree with the sentiment that paying nothing in fees is better than paying something in fees; but the choice of which day to make a transaction will likely affect your return far more than 0.035%.
Transactions?? I’m buy and hold. I don’t need no stinken’ transactions.
Yeah, but presumably you're planning to sell something EVENTUALLY... :happy

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by ryman554 » Tue Jun 12, 2018 8:58 am

alfaspider wrote:
Mon Jun 11, 2018 10:41 am
Yep. The difference between .04% and zero is really pretty minuscule. The article shows that a .09% ER fund (more than double VTI) will cost $1,500 over 30 years, but it should be pointed out that at the same growth rate, that fund would also grow by over $47,000. Fees make a BIG difference when you are talking about 1.5% AUMs and 5% loads. When you are talking about .04% vs .03% ERs, they become noise.
*IF* those numbers are real, the fees cost me 1500 / (47000 + 1500) = 3% of my profit.

Is that noise? Probably not. I'd love 0 fees.

The difference between .04 and .03 fees can be estimated at < 0.5% effect on profit. Is that noise? Probably.

Point being, the effect on fees isn't relative to the principle, even if they are based on AUM, it's based on how much of the profit/growth is lost due to the presence of fees.

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by ReformedSpender » Tue Jun 12, 2018 12:06 pm

I've never met an individual that believes he or she will be able to invest in the market for free. If we truly approach zero for passive type funds, it makes me wonder where fees will pop up unexpectedly (think banks marketing "free checking").

There is no such thing as a free lunch imo. It's got to cost something (somewhere)!

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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by triceratop » Tue Jun 12, 2018 12:13 pm

ReformedSpender wrote:
Tue Jun 12, 2018 12:06 pm
I've never met an individual that believes he or she will be able to invest in the market for free. If we truly approach zero for passive type funds, it makes me wonder where fees will pop up unexpectedly (think banks marketing "free checking").

There is no such thing as a free lunch imo. It's got to cost something (somewhere)!

:beer
It depends on what you mean by "for free" -- if you mean with zero tracking error after costs relative to a market index then it is already possible. In fact in 2017 the Vanguard Total Stock Market Institutional Select Shares outperformed the benchmark CRSP US Total Market Index by 1 basis point.

Also, "free" checking is absolutely possible in the sense that you mean -- the hidden cost to the consumer is that the bank is paying a lower interest rate than the consumer could get on the open market.
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by ccieemeritus » Wed Jun 13, 2018 2:01 am

While I like lower fees, I get suspicious when something is free. All companies have expenses. If I’m not paying then I’m not the customer: I’m the product.

I understand from the article there’s some revenue from lending shares. But I’d still be suspicious.

afan
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Re: WSJ-- Next Stop for Mutual-Fund Fees: Zero

Post by afan » Wed Jun 13, 2018 7:24 am

Nothing to be suspicious about. The expense ratio is one source of revenue to pay the costs of running the fund. To the extent that those costs can be covered from other sources the ER can go down.

Whether the ER goes down is a management decision. An alternative would be to keep the ER at a rate that would cover the full cost of the fund and direct all the lending revenue to fund returns. The investors would end up at.the same place but without a zero expense ratio.

I used.to worry about the competition upping the fees once they had some investors locked in.
But I think a large share of this money is in retirement accounts. So participants can switch fund companies, at least once they are eligible to roll over into IRAs.

The ERs have continued to fall even as the amounts have grown. It is not lost on the competition that, while low cost indexing has grown a lot, it has grown faster at Vanguard. Raising fees would make the other companies see even more money get pulled out and sent to Vanguard.

Places like Schwab and Fidelity clearly think they are better off having those assets under management than kissing them goodbye, which is what would happen if they raised prices.

But we keep taxable with Vanguard, just in case.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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