You may have noticed news coverage in recent weeks about reductions in expense ratios for some of Vanguard’s funds. Most recently, for example, we reported that expenses declined for several of our international index funds.
As one who long has advocated that investors focus on the costs of investing, I’m happy to see expense ratios get attention. Lower costs allow the investors who put up the capital and take the risks to keep more of the returns their assets earn.
But I have a quibble with one aspect of some reports I’ve seen: the implication that reduced expense ratios at some Vanguard funds amount to engaging in a “price war” with other firms.
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In a post last month, I mentioned the skepticism we hear from time to time about Vanguard’s client-owned, at-cost structure.
In brief, under this novel structure the various Vanguard mutual funds own the operating company—The Vanguard Group, Inc.—that exists to serve those funds. No other owner pulls a profit from the operating company.
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While listening to groups of investors recently as part of some research, we learned something that was, to us, a bit disappointing.
And thereby hangs a tale.
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It’s a question we hear from time to time on this blog, as well as through e-mails, letters, and phone calls: “Why does Vanguard advertise?”
It’s a fair question. And believe me, it’s a topic debated vigorously by Vanguard’s leadership team. Given the fact that the expense is ultimately borne by the shareholders in our funds, which in turn are the sole owners of Vanguard, one might well ask, in the words of one client—“Why spend some of my money to attract some other investor?”
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