By Martin Krikorian
“In investing, you get what you don’t pay for. Costs matter.”
— John Bogle, founder and former CEO of The Vanguard Group
Last year was another recording-breaking year for Vanguard funds. Vanguard generated net inflows of $368 billion in 2017, which was 13.9 percent more than in 2016. Over the past three years, Vanguard has brought in more than eight times more money than the rest of the fund industry (more than 4,000 firms) combined. Vanguards impressive fund performance may explain its significant increase of asset inflows. The accompanying chart shows the percent of Vanguard funds that have outperformed the average returns of their competing fund peer groups over the last three- five- and 10-year periods. Vanguard funds have produced superior returns compared to their peers.
One the biggest reasons why Vanguard funds outperform the vast majority of mutual fund families is that they have the lowest expenses. The average Vanguard fund’s expense ratio is 81 percent less than the industry average. Many investors mistakenly think looking at a fund’s recent performance or Morningstar rating, they can determine which funds are likely to outperform. However, a funds star rating and past performance are not as good a predictor of future performance as fund expenses. Numerous studies over the years have consistently demonstrated that low fees, are the single best predictor of success for mutual funds.
Even Morningstar acknowledges that fund expenses are better at predicting future performance than its own “star” rating system.
“Investors should make expense ratios a primary test in fund selection. They are the most dependable predictor of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile. If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.”
— Russel Kinnel, Morningstar’s director of mutual fund research
Vanguard derives much of its low-cost advantage from its unique corporate structure. Most mutual fund companies are publicly traded companies owned by private investors or owners. And the primary objective of any publicly-traded company is to generate profits for the owners of the mutual fund company. Those profits come directly out of the pockets of their clients.
By contrast, Vanguard is not a public company. Vanguard is owned by its mutual funds and clients who invest in those funds. Vanguard is essentially like a credit union for mutual funds. There are no profits going to outside owners. Each owner of a fund is essentially a part-owner of Vanguard. This unique structure means investors keep more of their investment gains because it costs less to operate the mutual funds.
Anyone who has read this column over the last 17 years knows that I am a big proponent of Vanguard funds. For the record, as an independent fee-only registered investor advisor, Capital Wealth Management has no affiliation with Vanguard or any other mutual fund family. Approximately 90 percent of our client’s assets under management at Capital Wealth Management are invested in Vanguard funds. In addition to low expenses, Vanguard funds have no front-end loads, no commissions, no back-end loads, and no 12b-1 fees which, allows our clients to keep more of their returns. Vanguard also has the largest selection of no-load index funds available to investors.
Martin Krikorian is president of Capital Wealth Management, a registered investment adviser providing “fee-only” investment management services located at 9 Billerica Road, Chelmsford. He is the author of the investment books, “10 Chapters to Having a Successful Investment Portfolio” and the “7 Steps to Becoming a Successful Investor.” Martin can be reached at 978-244-9254, Capital Wealth Management’s website; www.capitalwealthmngt.com, or via email at email@example.com.