Vanguard has played a big role in my journey towards financial independence and freedom from the start. But why is that? Why is Vanguard considered the best in the industry? Today, I wanted to take a closer look at one of the longest going and most trusted brokers and fund management companies out there: Vanguard.
Why Vanguard is the best. Not only does Vanguard offer ETFs with some of the lowest expense ratios out there, but their entire company structure is also set up for investor success. Investors in Vanguard’s funds become shareholders of the company; there is no third party involved. Jack Bogle – the founder of Vanguard – literally invented index funds. The list goes on and on.
Let’s look at each of these points in more detail to truly understand how unique Vanguard’s investment offerings are in many ways:
1. Low Fees
It’s no secret that Vanguard has some of the lowest fees in the industry – especially when it comes to their ETFs. Take VTI for example which is their total stock market ETF. With over 130 Billion dollars of assets under management, the expense ratio remains at an underwhelming 0.03%. And the same goes for VOO.
Just to illustrate this idea further, have a look at the following chart comparing Vanguard’s fees to the industry average:
While the industry average bounces somewhere between 0.5% and 1.0% Vanguard has been continuously working to decrease their fees overall. And with success!
As of 2020 Vanguard was once again able to offer a new average record low in overall fees at around just 0.2%. This is across all investment products even including mutual funds. During the same time frame, the industry average has barely changed and remains around 0.6%.
Even though a 0.4% difference may not seem like a lot, here’s how this difference can accumulate over time with a portfolio of $10,000:
The graphs above illustrate the growth of a $10,000 portfolio in a 529 plan over 18 years with a difference in fees of around 0.3% (so even less than the average difference in fees we saw above).
The result is quite astonishing. This small difference in percentage points would cost you almost $1,000 over time – or 10% of your initial investment. And if you’re like me you’re probably thinking about investing more than $10,000 with Vanguard eventually.
2. Tax Efficiency
First of all, let’s talk about the tax efficiency of index funds in general. There are several reasons why you will pay less taxes on your ETFs vs individual stocks:
Exchange-traded funds simply mirror the holding of an index, meaning they don’t constantly trade stocks in or out. This has a huge effect on taxes since every time a stock is sold it is subject to capital gains tax. This tax is naturally passed on to investors in actively managed funds where the fund manager buys and sells stocks at will (*cough* after a thorough analysis, of course, *cough*).
In actively managed funds, the entire holding of specific stocks and security is frequently sold or exchange for a different company. In index funds, this only happens if the stock is completely removed from the index (which usually does not happen too often or even at all in a total stock market fund such as VTI). This provides tax efficiency because the selling of an entire holding of specific security regularly results in large capital gains tax burden for investors.
As we have seen above, Vanguard specifically has managed to lower fees and taxes over the past decade while the industry average has remained about the same. Why is this? Well, economies of scale, essentially.
The more people invest in Vanguard, the easier it will be for each ETF to act tax-efficiently: as more money is introduced to the fund it becomes more and more liquid allowing for holdings to be exchanged and filled by investors instead of buying and selling shares. These savings are directly passed on to the investor.
3. Ownership Structure
As I’ve highlighted many times before, the ownership structure of The Vanguard Group, Inc. (VGI) is quite unique.
VGI is the management company that administers all the various exchange-traded funds, from VTI to VYM and beyond. Usually, this is the company that third party shareholders have a stake in. This is the entity that is supposed to distribute the profits made from investor fees.
Vanguard works differently:
In the case of Vanguard, the clients who invest in their funds become shareholders of that fund. The funds, in turn, own the management company: VGI. This means the entire Vanguard Group is factually owned by the investors. Thus, there is no need for a third and no need to make a profit. (Read more here: How does Vanguard make money?)
4. Safety & Insurance
Because of the aforementioned point and the way the entire group is structured it is pretty much impossible for Vanguard to fail. No matter what VGI – administrative body decides to do – your funds will always be protected as they are shielded by a completely separate LLC.
The only risk in terms of losing your funds is due to market fluctuations and stock prices. Because you are essentially transacting with yourself when investing in a Vanguard fund, there is absolutely no counter-party risk with Vanguard.
5. Jack Bogle
How could you not love Jack?
Jack Bogle is the founder of Vanguard and one of the only true pioneers in the consumer investment space. His vision several decades ago to create investment products that would give retail investors the best chance to succeed in the market was ridiculed, laughed at, and put off.
His persistence and endurance made index investment as we know it today possible.
As you can maybe tell, I am a sucker for a good story and some nostalgia. But why not entrust my financial freedom to a company whose values have been clearly defined and beneficial to investors from the start?
What are your thoughts on Vanguard? Tell why you think Vanguard is (or isn’t) the best!
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
2) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
3) If you are interested in crypto, check out Gemini. I've started allocating a small amount of assets to the growing crypto space and Gemini has just been a breeze to use. Once you register, make sure to also open an Active Trader account to buy crypto at the lowest fees on the market (just 0.03%!).
To see all of my most up-to-date recommendations, check out the Recommended Tools section.