Why Fees Really Matter with Eric Balchunas, Bloomberg Intelligence (Nov 8, 2023)
Fees matter more than you think. Over the long term, the difference between a few basis points can turn into real, big money. On this episode, Bloomberg Intelligence ETF analyst Eric Balchunas joins us to discuss how fees can significantly impact your portfolio.
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About this week’s guest:
Eric Balchunas is been an ETF Analyst for Bloomberg Intelligence. He has been covering the investing industry for nearly 2 decades. His 2016 article “How the Vanguard Effect Adds Up to $1 Trillion” shocked the investment community. He is the author of The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions.
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Transcript: Music: Its Money that matters
Are fund fees going to 0? The trend for ETF prices have been lower fees. Now after decades of falling prices those fees are approaching 0
Let’s bring in an expert to help us unpack this: Eric Balchunas senior ETF analyst at Bloomberg intelligence as a writing about funds and ETFs for years Eric what’s going on here are are fees going to zero?
Well, they have been going that way for a while there’s already a couple 0 fee ETF out there they are from companies that aren’t as popular as a Schwab or a State Street so I think once you get below 5 basis points you get to this realm of like super dirt cheap where people don’t really care are you 3 or 4 are you two or three you know it it’s all almost free basically
And for people who don’t talk in basis points 1% is 100 basis points so we’re talking about 3 basis points is 3% of 1%
So if you put $10,000 into the three basis point ETF it’ll be 3 bucks a year
That’s crazy, its free
It is crazy, it’s a beautiful thing yeah it is it’s I call it the great cost migration I call it the fee wars This is why I call the ETF industry the terrordome because it is brutal if you’re an issuer everybody’s cutting fees all the time but The thing is it works cutting fees almost is like batting 1000 and if you do that the flows will come
So let’s put a little the history in place back in 2016 you wrote a column titled the Vanguard effect and the take away was the fee pressure the Vanguard Group was putting on Wall Street was saving investors a trillion dollars explain
If you if you say all the money that went to Vanguard if it were the finger didn’t exist right you the a lot of that money is going to be in mutual funds which have an asset weighted average fee of about 65 basis points; On an average fee there are over 1% but I’d like to asset weighted to be fair that just basically says we’re most of the assets so 66
If that money were in a average Vanguard fund that charges Vanguard’s asset weighted averages 9 basis points – that’s a huge saving so that money moving over there – if it weren’t in Vanguard would we would paying 66 instead of nine then Vanguard only has half of the passive assets the other half are people who copied them so they’re – Blackrock, State Street, Schwab even JP Morgan and Goldman now have Vanguard-esque, even Fidelity
That was the ultimate sort of surrender because fidelity’s been active manager but fidelity has cheaper index funds in Vanguard now and they advertise it so it’s amazing so half of the other half I kind of credit to bogler Vanguard so if you Add all that up you’re looking at a trillion dollars total but that number grows by about 150 billion a year and and that number grows every year so in the course of the next decade or two we’re going to look at four or five actually in savings just from what Bogle and Vanguard did that
That’s unbelievable and let’s flesh this out when Vanguard launched in 1974 mutual fund fees were what 2%, 1.86% some crazy number like that imagine that was it there was hardly any competition the fees were what they were this is really been half a century of of fee pressure
When I talk about how investors respond to lower fees it happened with Vanguard’s first index fund was priced at 66 basis points — right around what mutual funds were on the cheaper side. And over time no one cared at first because that was still kind of crazy but over time they kept cutting the fee because of the way their structure is
So when they got into like the 2000s they’re now at like 14, 15 basis points really cheap then they hit 2008 2010 they go under 10 once you get into 10 you’re in like irresistible area people people go Gaga for something that’s got the single digit basis point fee and why not there’s been major studies that show if you pay like a couple basis points over 30-40 years you get so much more of the compounding returns versus the asset manager
Why is this important why do a few basis points here or there matter can can that can’t possibly add up over decades can it?
It does so when Bogle was trying to sell the index fund everybody thought ohh it’s average I don’t want to be average I don’t we worked on by an average doctor it was hard to sell average to the American public we want winners one chart he used that was very compelling and I tell everybody look go look this up it’s a chart of the growth of $10,000 / 50 years 1 of it makes makes 8% a year and the other makes 6% a year the 2% would be the fees you pay the active fund plus the turnover and trading costs the 8% would be paying no fees the no fees you get something like 300 and $60,000 the 6% compounding only gives you like $170,000 – basically double – and so when you put it in dollars and cents like that over time it really matters and to put that another way that that’s 8% that took 60% of your total returns over those 50 years so with the with the no fee you get basically 98% something like that of the total returns because remember we’re all here for one reason compounding returns right the magic of compounding and as those returns compound the lower the fee is the more that beautiful magic ends up in your pocket and if you’re talking about larger investment dollars
Vanguard put out a research piece some time ago that if you put up $1,000,000 and let it compound over 30 years by the time you’re at the end of those 30 years that feed differential is about 30% so if you start out with only 100 it’s double but you know just to talk in terms of percentage it’s not insubstantial after two or three decades yeah absolutely so the difference between paying like 80 basis points versus like 8 is major now when we get to 8:00 to 7:00 it’s a little less consequential so that’s why I say do we need to 0 fee ETF refund not really I think once you get below 5
You’re good I don’t think people in fact there’s almost a case made that people sometimes repel from zero they feel like it’s a gimmick perhaps right and So what we found is that if you look at advisor surveys the two most important criteria with them picking an ETF number one is fee #2 is brand that’s why we tend to see the money going to the big brands let’s say Vanguard BlackRock definitely but also State Street and vesco Schwab these brands plus a low fee irresistible but if you take a a brand that’s not known for this there was a company called focus shares back in the day they tried to undercut nobody really cared because nobody knew that brand and it felt gimmicky so that’s why I think the brand is also important here
It’s not just the low fee it’s the low fee plus the brand that is almost like an irresistible value proposition for most people let me throw a little bit of the curveball at you we’re talking about mutual funds and ETF’s but the reality is that’s 2025 trillion dollars there’s still another 50 trillion in equity in and another I don’t know 75 trillion in bonds behind that how significant are ETF’s and mutual funds to how people manage their assets I think they’re huge because in the end consumers typically like convenience if you make something more convenient you’re probably going to find some customers and so to me a mutual fund really pushed the envelope to make convenient if you you give me your money and I’ll take care of buying all the stocks we’ll get diversification going that way we don’t like have we don’t pick one stock and it goes to so we lose all our money we’ll diversify and I’ll manage it for you the problem is the the mutual fund structure isn’t nearly as efficient or there’s a multitude of reasons 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 ETF tend to be more efficient tax efficient they tend to be cheaper they you’re able to get in and out then whenever you want mutual funds only one time a day and they really fit nicely on brokerage platforms which most people use and so to me ETF’s are sort of the vehicle for the 21st century I’ve often compared them to the MP3 whereas the mutual fund is kind of like a compact disc MP3 I don’t I now can buy exactly the songs I want or if you stream and you can add this flexibility if it’s on your phone better compact disc harder to you know lug them around so I think every industry goes through this.
I would also say an Uber to the cab that’s another industry Uber uses the Internet it’s cleaner like someone there’s always these disruptive events and so ETFs are big but I gotta say ETFs at 80 basis points wouldn’t be a big deal they’re only really popular in sweeping the country because they’re cheap and you have to give Vanguard and Bogle credit that’s where even though he didn’t like ETFs
He had this monumental impact on him so to me whether it’s an index mutual fund or an ETF the bigger trend is the great cost of migration and you got to go back to boggle on that that said when it comes to getting investments in a local fee format I think the ETF vehicle is the one most people prefer thanks Eric really interesting stuff just a relentless pressure on prices that saved investors trillions of dollars but more importantly we are aware of the impact of compounding 10/20/30 basis points makes a huge difference over time especially if we’re talking about decades and So what lower fees mean is better performance over the long haul for investors you can listen to at the money every week find it in our masters and business feed at bloomberg.com apple podcast and Spotify E tweet will be here to discuss the issues that matter most to you as an investor
I’m Barry ritholtz you’ve been listening to At The Money on Bloomberg radio.
