By Todd Rosenbluth, CFRA
Last week, Vanguard continued its tradition of lowering the expense ratio of its index-based mutual funds and ETFs with the fee reduction of several dozen equity, fixed income and asset allocation funds across various share classes; Vanguard also reported one portfolio has a fee increase. Read more http://prn.to/2qmVwoH
CFRA expects the variety of lower-cost passive products will further cause investors and advisors to shift money away from actively managed funds, in light of the performance challenges. In the three-year period ended 2016 just 7% of active large-cap mutual funds outperformed the S&P 500 index.
Year to date through April, Lipper large-cap core mutual funds were behind the S&P 500 index by 52 basis points.
Overall, fee compression is worth applauding as the more money being put to work into investor portfolios will help them better achieve their long-term goals. For example, Vanguard trimmed the fee for its S&P 500 index products, Vanguard 500 Index; Admiral class (VFIAX 218 ****) and Vanguard 500 Index: ETF (VOO) by one basis point to 0.04% and it will enable shareholders to better replicate the performance of the large-cap index.
While VFIAX is one basis point more expensive than Schwab S&P 500 Index (SWPPX), VOO’s fee matches iShares S&P 500 (IVV) and will help Vanguard narrow the minor potential performance gap between its offerings and competing products. They all hold the same large-cap securities at the same weighting and management does a similarly strong job tracking the index.
However, most of the other fee cuts occurred at ETF or mutual fund products that are not identically constructed to their passive peers.
For example, the expense ratio for Vanguard FTSE Developed Markets ETF (VEA) fell by two basis points to 0.07%. This makes VEA one basis point cheaper than iShares Core MSCI EAFE Index (IEFA). However, IEFA’s 11.2% year to date gain through April 27 was ahead of VEA’s 10.4% as performance is driven more holdings than fees. VEA has exposure to Canada (8% of assets) not found in IEFA and it has a lower stake in France and Germany.
As more money moves to lower-fee passive products, we expect asset managers offering active alternatives will need to find ways to bring costs. Because the case for charging 100 basis points or more than a Vanguard, iShares or Schwab product is dependent upon consistently outperforming, a task that hard for many to do.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.