08 November 2023

At the Money: Why Fees Really Matter

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5Insights

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Hot Take· 1

Hot Take09:08

ETFs Would Not Matter Nearly as Much Without Low Fees

The popularity of ETFs is often attributed to their structure and convenience, but Balcunis argues that low cost is the decisive force behind their expansion. An ETF charging eighty basis points would lose much of its disruptive appeal, regardless of its trading flexibility.

Structural efficiency alone did not create the ETF boom.
Cheap access made ETFs broadly attractive.
Vanguard and Jack Bogle influenced ETFs even though Bogle disliked the vehicle.
The broader transformation is migration toward low-cost investing across fund structures.

“But I gotta say ETFs at eighty basis points wouldn't be a big deal.”
Eric Balcunis · 09:20

“the bigger trend is the great cost migration, and you got to go back to Bogel on that.”
Eric Balcunis · 09:35

#etfs#low-cost-investing#disruption#jack-bogle

Explainer· 4

Explainer01:17

How the Great Cost Migration Drove Fund Fees Toward Zero

Competition among ETF issuers has pushed expense ratios into single-digit basis points and, in a few cases, to zero. Balcunis calls this both the great cost migration and the fee wars because issuers face relentless pressure to cut prices in order to attract assets.

Several zero-fee ETFs already exist.
Single-digit basis-point products are effectively very cheap.
Fee reductions reliably attract investor flows.
ETF competition has compressed issuer margins.

“I call it the great cost migration. I call it the fee wars.”
Eric Balcunis · 02:00

“Cutting fees almost is like batting one thousand, and if you do that, the flows will come.”
Eric Balcunis · 02:11

#etfs#fees#competition#fund-flows

Explainer02:16

How the Vanguard Effect Saved Investors Trillions

Vanguard's low-cost structure did more than reduce fees for its own customers; it forced competitors to offer cheaper passive products. Balcunis estimates the resulting savings at roughly a trillion dollars already, with the total increasing by about $150 billion annually.

Average Vanguard fund fees were far below the asset-weighted mutual-fund average.
Competing firms copied Vanguard's low-cost model.
Fidelity eventually offered index funds cheaper than Vanguard's.
Industry-wide savings may reach several trillion dollars over coming decades.

“Then Vanguard only has half of the passive assets. The other half are people who copy them.”
Eric Balcunis · 03:05

“But that number grows by about one hundred and fifty billion a year, and that number grows every year.”
Eric Balcunis · 03:29

#vanguard#index-funds#fee-pressure#jack-bogle

Explainer04:46

Why a Two-Point Fee Gap Can Halve Long-Term Wealth

A comparison of $10,000 compounding for fifty years at eight percent versus six percent illustrates the disproportionate cost of recurring fees and trading expenses. The higher return produces roughly $360,000, while the lower net return produces about $170,000, showing that fees also remove the future returns those dollars could have earned.

Fees reduce both invested capital and future compounded growth.
A two-percentage-point annual gap can roughly halve terminal wealth over fifty years.
Expressing fees in dollars makes their long-term effect easier to understand.
Lower costs leave more of the market's return with the investor.

“The no fees you get something like three hundred and sixty thousand dollars. The six percent compounding only gives you like one hundred and seventy…”
Eric Balcunis · 05:21

“the lower the fee is, the more that beautiful magic ends up in your pocket.”
Eric Balcunis · 05:56

#compounding#expense-ratios#long-term-investing#returns

Explainer07:58

Why ETFs Are the MP3 to the Mutual Fund's Compact Disc

Balcunis argues that ETFs deliver the diversification and management benefits associated with mutual funds through a more flexible vehicle. ETFs tend to be cheaper and more tax-efficient, trade throughout the day, and integrate naturally with modern brokerage platforms.

Mutual funds made diversified investing convenient.
ETFs can deliver active or passive strategies.
ETFs generally offer stronger trading flexibility and tax efficiency.
The MP3 analogy frames ETFs as a modern delivery format rather than a different underlying purpose.

“The ETF structure, in my opinion, is a better vehicle to deliver what a mutual fund tries to deliver, whether that's active, passive, or whatever.”
Eric Balcunis · 08:28

“So to me, ETFs are sort of the vehicle for the twenty first century.”
Eric Balcunis · 08:50

#etfs#mutual-funds#tax-efficiency#investment-vehicles