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At the Money: Why Fees Really Matter · Masters in Business

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  Speaker 1: I'm Barry Ridults, and I'm excited to tell you about
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  Speaker 1: my new podcast, At the Money. Each week, I'm going
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  Speaker 1: to spend about ten minutes or so diving deep into
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  Speaker 1: a specific topic that affects you and your money, acquiring it,
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  Speaker 1: spending it, and most of all, investing it. We'll talk
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  Speaker 1: about things like portfolio construction, why fees matter, how to
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  Speaker 1: build a set of bond holdings, why it matters so
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  Speaker 1: much to manage your own behavior as an investor. Strap
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  Speaker 1: in for At the Money. Starting right now, we.
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  Speaker 2: Are committed to lowering fees to an ETA. You're competing
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  Speaker 2: against people that have two basis points fees. The margins
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  Speaker 2: on ETF tend to be lower than mutual funds or
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  Speaker 2: other types of products.
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  Speaker 1: Are fun fees going to zero? The trend for ETF
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  Speaker 1: prices have been lower fees. Now, after decades of falling price,
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  Speaker 1: those fees are approaching zero. Let's bring in an expert
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  Speaker 1: to help us unpack this. Eric Balcunis is senior ETF
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  Speaker 1: analyst at Bloomberg Intelligence. As in writing about funds and
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  Speaker 1: ETFs for years, Eric, what's going on here? Are fees
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  Speaker 1: going to zero? Well?
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  Speaker 2: They have been for a while. There's already a couple
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  Speaker 2: zero fee ETFs out there. They are from companies that
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  Speaker 2: aren't as popular as a schwab or a state street.
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  Speaker 2: So I think once you get below five basis points,
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  Speaker 2: you get to this realm of like super dirt cheap
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  Speaker 2: where people don't really care are you three or four?
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  Speaker 2: Are you two or three? You know, it's all almost
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  Speaker 2: free basically.
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  Speaker 1: And for people who don't talk in basis points, one
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  Speaker 1: percent is one hundred basis points, so we're talking about
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  Speaker 1: three basis points is three percent of one percent.
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  Speaker 2: Yeah, so if you put ten thousand dollars into the
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  Speaker 2: three basis point ETF, it'll be three bucks a year.
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  Speaker 1: That's crazy.
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  Speaker 2: It is crazy. It's a beautiful thing free, Yeah, it is.
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  Speaker 2: It's I call it the great cost migration. I call
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  Speaker 2: it the fee wars. This is why I called the
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  Speaker 2: ETF industry the terodome, because it is brutal. If you're
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  Speaker 2: an issuer, everybody's cutting fees all the time. But the
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  Speaker 2: thing is it works. Cutting fees almost is like batting
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  Speaker 2: one thousand, and if you do that, the flows will come.
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  Speaker 1: So let's put a little history in place. Back in
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  Speaker 1: twenty sixteen, you wrote a column titled the Vanguard Effect,
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  Speaker 1: and the takeaway was the fee pressure the Vanguard group
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  Speaker 1: was putting on Wall Street was saving investors a trillion dollars.
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  Speaker 2: Explain, Yeah, so if you say all the money that
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  Speaker 2: went to Vanguard, if it were if Vanguard didn't exist, right,
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  Speaker 2: A lot of that money is going to be in
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  Speaker 2: mutual funds, which have an asset weighted average fee of
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  Speaker 2: about sixty five basis points. On an average fee, they're
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  Speaker 2: over one percent, but I like to asset weight it
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  Speaker 2: to be fair. That just basically says where are most
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  Speaker 2: of the assets? So sixty six. So if that money
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  Speaker 2: were in a average Vanguard fund that charges Vanguard's age
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  Speaker 2: asset weighted average is nine basis points, So that's a
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  Speaker 2: huge savings. So that money moving over there, if it
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  Speaker 2: weren't in Vanguard, we'll be paying sixty six instead of nine.
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  Speaker 2: Then Vanguard only has half of the passive assets. The
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  Speaker 2: other half are people who copy them.
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  Speaker 1: So lack Rock, State Street, Schwab.
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  Speaker 2: Even JP, Morgan and Goldman now have Vanguard ESK in Fidelity.
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  Speaker 2: That was the ultimate sort of surrender because Fidelity has
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  Speaker 2: been the active manager, but Fidelity has cheaper index funds.
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  Speaker 2: Than Vanguard now, and they advertise it, so it's amazing.
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  Speaker 2: So half of the other half I kind of credit
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  Speaker 2: to Bogel or Vanguard. So if you add all that up,
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  Speaker 2: you're looking at a trillion dollars total. But that number
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  Speaker 2: grows by about one hundred and fifty billion a year,
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  Speaker 2: and that number grows every year. So in the course
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  Speaker 2: of the next decade or two, we're gonna look at
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  Speaker 2: four or five trillion in savings just from what Bogel
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  Speaker 2: and Vanguard did.
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  Speaker 1: That's unbelievable. And let's flesh this out. When Vanguard launched
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  Speaker 1: in nineteen seventy four, mutual fund fees were what two
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  Speaker 1: percent one point eighty six, some crazy number like that.
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  Speaker 1: Imagine that was it. There was hardly any competition. The
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  Speaker 1: fees were what they were. This has really been half
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  Speaker 1: a cent of feet pressure.
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  Speaker 2: Yeah, So when I talk about how investors respond to
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  Speaker 2: lower fees, it happened with Vanguard two. Vanguard's first index
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  Speaker 2: fund was priced at sixty six basis points, right around
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  Speaker 2: what mutual funds were, or the cheaper side, and over
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  Speaker 2: time no one cared it first because that was still
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  Speaker 2: kind of pricey, but over time they kept cutting the
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  Speaker 2: fee because of the way their structure is. So when
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  Speaker 2: they got into like the two thousands, they're now at
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  Speaker 2: like fourteen twelve basis points really cheap. Then they hit
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  Speaker 2: two thousand and eight twenty ten, they go under ten.
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  Speaker 2: Once you get under ten, you're in like irresistible area.
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  Speaker 2: People go gaga for something that's got the single digit
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  Speaker 2: basis point fee, and why not. There's been major studies
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  Speaker 2: that show if you pay like a cold basis points
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  Speaker 2: over thirty forty years, you get so much more of
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  Speaker 2: the compounding returns versus the asset manager.
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  Speaker 1: So why is this important? Why do a few basis
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  Speaker 1: points here or there matter? Can that can't possibly add
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  Speaker 1: up over decades? Can it?
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  Speaker 2: It does? So when Bogel was trying to sell the
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  Speaker 2: index fund, everybody thought, oh, it's average. I don't want
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  Speaker 2: to be average. I don't want be worked on by
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  Speaker 2: an average doctor. It was hard to sell average to
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  Speaker 2: the American public. We want winners. One chart he used
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  Speaker 2: that was very compelling, and I tell everybody, look, go
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  Speaker 2: look this up. It's a chart of the growth of
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  Speaker 2: ten thousand dollars over fifty years. One of it makes
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  Speaker 2: makes eight percent a year, and the other makes six
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  Speaker 2: percent a year. The two percent would be the fees
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  Speaker 2: you pay the active fund plus the turnover and trading costs.
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  Speaker 2: The eight percent would be paying no fees. The no
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  Speaker 2: fees you get something like three hundred and sixty thousand dollars.
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  Speaker 2: The six percent compounding only gives you like one hundred
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  Speaker 2: and seventy thousand.
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  Speaker 1: Dollars, basically double.
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  Speaker 2: And so when you put it in dollars and cents
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  Speaker 2: like that over time, it really matters. And to put
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  Speaker 2: that another way, that's eight percent. That took sixty percent
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  Speaker 2: of your total returns over those fifty years. So with
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  Speaker 2: the with the no fee, you get basically ninety eight
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  Speaker 2: percent something like that of the total returns. Because remember
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  Speaker 2: we're all here for one reason. Compounding returns the magic
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  Speaker 2: of compounding, and as those returns compound, the lower the
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  Speaker 2: fee is, the more that beautiful magic ends up in
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  Speaker 2: your pocket.
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  Speaker 1: And if you're talking about larger investment dollars, Vanguard put
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  Speaker 1: out a research piece some time ago that if you
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  Speaker 1: put up a million dollars and let a compound over
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  Speaker 1: thirty years, by the time you're at the end of
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  Speaker 1: those thirty years, that fee differential is about thirty percent
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  Speaker 1: so if you start out with only one hundred, it's double.
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  Speaker 1: But you know, just to talk in terms of percentage,
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  Speaker 1: it's not insubstantial after two or three decades.
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  Speaker 2: Yeah. Absolutely, So the difference between paying like eighty basis
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  Speaker 2: points versus like eight is major. Now when we get
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  Speaker 2: to eight to seven, it's a little less consequential. So
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  Speaker 2: that's why I say, do we need a zero fee
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  Speaker 2: ETF for fun? Not really. I think once you get
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  Speaker 2: below five, you're good. I don't think people. In fact,
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  Speaker 2: there's almost a case you made that people sometimes repel
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  Speaker 2: from zero. They feel like it's a gimmick. Perhaps right.
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  Speaker 2: And so what we found is that if you look
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  Speaker 2: at Advisor surveys, the two most criteria for them and
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  Speaker 2: picking an ETF. Number one is feet, Number two is brand.
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  Speaker 2: That's why we tend to see the money going to
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  Speaker 2: the big brands, let's say Vanguard, Blackrock definitely, but also
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  Speaker 2: State Street, Invesco, Schwab. These brands plus a low fee irresistible.
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  Speaker 2: But if you take a brand that's not known for this.
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  Speaker 2: There was a company called Focus Shares back in the day.
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  Speaker 2: They tried to undercut Nobody really cared because nobody knew
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  Speaker 2: that brand, and it felt gimmicky. So that's why I
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  Speaker 2: think the brand is also important here. It's not just
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  Speaker 2: the low fee, it's the low fee plus the brand
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  Speaker 2: that is almost like an irresistible value proposition for most people.
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  Speaker 1: Let me throw a little bit of a curve ball
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  Speaker 1: at you. We're talking about mutual funds and ETFs, but
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  Speaker 1: the reality is that's twenty twenty five trillion dollars. There's
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  Speaker 1: still another fifty trillion inequity and another I don't know,
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  Speaker 1: seventy five trillion in bonds behind that. How significant are
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  Speaker 1: ETFs and mutual funds to how people manage their assets?
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  Speaker 2: I think they're huge because in the end, consumers typically
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  Speaker 2: like convenience. If you make something more convenient, you're probably
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  Speaker 2: going to find some customers. And so to me, a
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  Speaker 2: mutual fund really push the envelope to make convenient. You
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  Speaker 2: give me your money, and I'll take care of buying
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  Speaker 2: all the stocks. We'll get diversification going that way. We
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  Speaker 2: don't like have we don't pick one stock and it
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  Speaker 2: goes to zero, we lose all our money. We'll diversify
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  Speaker 2: and I'll manage it for you. The problem is the
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  Speaker 2: mutual fund structure isn't nearly as efficient, or there's a
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  Speaker 2: multitude of reasons. The ETF structure, in my opinion, is
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  Speaker 2: a better vehicle to deliver what a mutual fund tries
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  Speaker 2: to deliver, whether that's active, passive, or whatever. ETFs tend
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  Speaker 2: to be more efficient, tax efficient, they tend to be cheaper.
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  Speaker 2: They are you're able to get in and out them
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  Speaker 2: whenever you want. Mutual funds only one time a day,
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  Speaker 2: and they really fit nicely on brokerage platforms, which most
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  Speaker 2: people use. And so to me, ETFs are sort of
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  Speaker 2: the vehicle for the twenty first century. I've often compared
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  Speaker 2: them to the MP three, whereas the mutual fund is
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  Speaker 2: kind of like a compact discreet. I now can buy
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  Speaker 2: exactly the songs I want, or if you stream and
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  Speaker 2: you can add this flexibility. It fits on your phone better,
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  Speaker 2: compact disc harder to you know, lug them around. So
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  Speaker 2: I think every industry goes through this. I would also
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  Speaker 2: say an uber to the cab. That's another industry. Uber
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  Speaker 2: uses the Internet. It's cleaner like some of there's always
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  Speaker 2: these disruptive events, and so ETFs are big. But I
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  Speaker 2: gotta say ETFs at eighty basis points wouldn't be a
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  Speaker 2: big deal. They're only really popular in sweeping the country
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  Speaker 2: because they're cheap, and you have to give Vanguard and
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  Speaker 2: Bogel credit. That's where even though he didn't like ETFs,
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  Speaker 2: he had this monumental impact on them. So to me,
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  Speaker 2: whether it's an index mutual fund or an ETF, the
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  Speaker 2: bigger trend is the great cost migration, and you got
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  Speaker 2: to go back to Bogel on that. That said, when
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  Speaker 2: it comes to getting investments in a low fee format,
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  Speaker 2: I think the ETF vehicle is the one most people prefer.
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  Speaker 1: Thanks Eric, really interesting stuff, just a relentless pressure on
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  Speaker 1: prices that saved investors trillions of dollars. But more importantly,
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  Speaker 1: we are aware of the impact of compounding ten twenty
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  Speaker 1: thirty basis points makes a huge difference over time, especially
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  Speaker 1: if we're talking about decades, and so what lower fees
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  Speaker 1: mean is better performance over the long haul for investors.
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  Speaker 1: You can listen to At the Money every week, finding
• 10:24
  Speaker 1: in our Masters and business feed at Bloomberg dot com,
• 10:27
  Speaker 1: Apple Podcasts and Spotify. Each week we'll be here to
• 10:30
  Speaker 1: discuss the issues that matter most to you as an investor.
• 10:34
  Speaker 1: I'm Barry Ritolts, you've been listening to At the Money
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  Speaker 1: on Bloomberg Radio.