28 August 2024

At the Money: Why Fees Really Matter

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5Insights

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Explainer· 4

Explainer01:10

What Three Basis Points Actually Costs an ETF Investor

Balchunas translates an abstract expense ratio into dollars: three basis points equals three hundredths of one percent. On a $10,000 ETF investment, that means an annual cost of about three dollars.

One percent equals 100 basis points.
Three basis points equals 0.03%.
A three-basis-point fee costs about $3 annually per $10,000 invested.
Ultra-low ETF fees are already close to free in practical terms.

“So if you put ten thousand dollars into the three basis point ETF, it'll be three bucks a year.”
Eric Balchunas · 01:21

#basis points#etfs#fees#investing

Explainer01:47

How the Vanguard Effect Saved Investors an Estimated $1 Trillion

Balchunas estimates the Vanguard Effect by comparing the fees investors might have paid in conventional mutual funds with Vanguard's much lower asset-weighted fees. He also credits Vanguard and John Bogle for forcing competitors to create cheaper passive products, expanding the savings beyond Vanguard's own assets.

Traditional mutual funds had an asset-weighted average fee near 65 to 66 basis points.
Vanguard's comparable asset-weighted average was about nine basis points.
Competitors copied Vanguard's low-cost model.
Balchunas estimated total investor savings at roughly $1 trillion.
He expected the savings estimate to grow by about $150 billion annually.

“So if you add all that up, you're looking at a trillion dollars total.”
Eric Balchunas · 02:57

“that number grows by about one hundred and fifty billion a year”
Eric Balchunas · 03:02

#vanguard#john bogle#fund fees#index funds#investor savings

Explainer04:17

How a Two-Point Return Gap Can Halve Long-Term Wealth

A chart used by John Bogle compared $10,000 compounding for 50 years at eight percent with the same amount growing at six percent after fees and trading costs. The higher-return path reached roughly $360,000 versus about $170,000, illustrating how recurring costs capture a large share of an investor's potential wealth.

The comparison starts with $10,000 invested for 50 years.
Eight-percent growth produced roughly $360,000.
Six-percent growth produced roughly $170,000.
The two-percentage-point drag represented active-fund fees, turnover, and trading costs.
Long horizons magnify recurring costs through lost compounding.

“The no fees you get something like three hundred and sixty thousand dollars six percent. Compounding only gives you like one hundred and seventy thousand…”
Eric Balchunas · 04:55

“the lower the fee is, the more that beautiful magic ends up in your pocket.”
Eric Balchunas · 05:28

#compounding#investment returns#active funds#long-term investing#costs

Explainer07:29

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

Balchunas argues that ETFs deliver the diversification and professional packaging associated with mutual funds through a more efficient vehicle. He compares the ETF's flexibility and platform compatibility with the shift from compact discs to MP3s and streaming.

Mutual funds made diversified investing convenient.
ETFs can deliver both active and passive strategies.
ETFs tend to be cheaper and more tax efficient.
Investors can trade ETFs during the day, while mutual funds price once daily.
ETFs fit naturally on modern brokerage platforms.
Low costs, not structure alone, drove widespread ETF adoption.

“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 Balchunas · 07:59

“ETFs are sort of the vehicle for the twenty first century.”
Eric Balchunas · 08:21

#etfs#mutual funds#tax efficiency#financial innovation#brokerages

Story· 1

Story03:32

How Decades of Fee Cuts Made Index Funds Irresistible

Vanguard's first index fund was not immediately compelling because its fee remained close to prevailing mutual-fund prices. Its ownership structure enabled repeated reductions, and investor demand accelerated when fees finally entered single-digit basis points.

Vanguard's first index fund charged about 66 basis points.
Investors initially showed limited interest because the price was not dramatically cheaper.
Vanguard reduced fees progressively over time.
Demand accelerated after fees fell below ten basis points.
Lower prices helped turn indexing from an average-sounding product into a compelling value proposition.

“Once you get under ten and you're in like irresistible area, people go gaga for something that's got the single digit basis point fee.”
Eric Balchunas · 03:59

#vanguard#index funds#fee history#passive investing