You know what I say, where they are fun fees going to zero? The trend for ETF prices has been lower fees. Now, after a decade of falling prices, those fees are approaching zero. Let's bring in an expert to help us unpack this. Eric Balchunis's senior ETF analyst at Bloomberg Intelligence who writes about funds and ETFs for years. Eric, what's going on here with fees? Are they going to zero? Well?
They have been for a while. There's already a couple zero fee ETFs 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 five basis points, you get to this realm of like super dirt cheap where people don't really care are you three or four? Are you two or three? You know, it's all almost free basically.
And for people who don't talk in basis points, one percent is one hundred basis points, so we're talking about three basis points is three percent of one percent.
Yeah, So if you put ten thousand dollars into the three basis point ETF, it'll be three bucks a year. That's crazy, It is crazy. It's a beautiful thing.
Free.
Yeah, it is. I call it the great cost migration. I call it the fee wars. This is why I call the ETF industry the terrodome, 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 a thousand. If you do that, the flows will come.
So let's put a little history in place. Back in twenty sixteen, you wrote a column titled the Vanguard Effect, and the takeaway was the fee pressure the Vanguard group was putting on Wall Street was saving investors a trillion dollars. Explain.
Yeah, So if you say all the money that went to Vanguard, if it were if Vanguard didn't exist, right, a lot of that money is going to be in mutual funds which have an asset weighted average fee of about sixty five basis points on an average fee, they're over one percent. But I like to asset weight it to be fair. That just basically says where are most of the assets? So sixty six. So if that money were in a average Vanguard fund that charges Vanguard's asset
weighted averages nine basis points. So that's a huge saving. So that money moving over there, if it weren't in Vanguard, we'll be paying sixty six instead of nine. Then Vanguard only has half of the passive assets. The other half are people who copy them, so Lack Rocky, State Street, Schwab, even JP, Morgan and Goldman now have Vanguard ESK Infidelity. That was the ultimate sort of surrender because Fidelity has been the active manager. But Fidelity has cheaper index funds
than Vanguard now and they advertise it. So it's amazing. So half of the other half I kind of credit to Bogel or Vanguard. So if you add all that up, you're looking at a trillion dollars total. But that number grows by about one hundred and fifty billion a year, and that number grows every year. So in the course of the next decade or two, we're gonna look at four or five trillion in savings just from what Bogul and Vanguard did.
That's unbelievable. And let's flesh this out. When Vanguard launched in nineteen seventy four, mutual fund fees were what two percent one point eighty six some crazy number like that. Imagine that was it. There was hardly any competition. The fees were what they were. This has really been half a century of feet pressure.
Yeah, So when I talk about how investors respond to lower fees, it happened with Vanguard two. Vanguard's first index fund was priced at sixty six basis points, right around what mutual funds were, or the cheaper side, And over time no one cared at first because that was still kind of pricey. But over time they kept cutting the fee because of the way their structure is. So when they got into like the two thousands, they're now at
like fourteen twelve basis points really cheap. Then they hit two thousand and eight twenty ten, they go under ten. 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. And why not. There's been major studies that show if you pay like a couple basis points over thirty forty years, you get so much more of the compounding returns versus the asset manager.
So why is this important? Why do a few basis points here or there matter? Can that can't possibly add up over decades?
Can it? It does. So when Bogel was trying to sell the index fund, everybody thought, oh, it's average. I don't want to be average. I don't want to be 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 ten thousand dollars over fifty years. One of it makes makes eight percent a year, and the other makes
six percent a year. The two percent would be the fees you pay the active fund plus the turnover and trading costs. The eight percent would be paying no fees. 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 dollars double, 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's eight percent. That took sixty percent of your total returns over those fifty years. So with the no fee you get basically ninety eight percent something like that of the total returns. Because Remember we're all here for one reason. Compounding returns 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 a million dollars and let a compound over thirty years, by the time you're at the end of those thirty years, that feed differential is about thirty percent. So if you start out with only one hundred, 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 eighty basis points versus like eight is major. Now when we get to eight to seven, it's a little less consequential. So that's why I say, do we need a zero fee ETF for fun? Not really. I think once you get below five you're good. I don't think people. In fact, there's almost a case you 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 for them in picking an ETF. Number one is fee. Number two 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, Invesco, Schwab. These brands plus a low fee irresistible. But if you take a b 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 all so 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 a curve ball at you. We're talking about mutual funds and ETFs, but the reality
is that's twenty twenty five trillion dollars. There's still another fifty trillion inequity and another I don't know, seventy five trillion.
In bonds behind that. How significant are ETFs 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. 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 zero, we lose all our money. We'll diversify
and I'll manage it for you. The problem is the mutual fund structure isn't nearly as efficient or there's a multiitude 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. ETFs tend to be more efficient, tax efficient, they tend to be cheaper. They are you're able to get in and out them
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, ETFs are sort of the vehicle for the twenty first century. I've often compared them to the MP three, whereas the mutual fund is kind of like a compact disc MP three. I now can buy exactly the songs I want, or if you stream and you can add this flexibility. It fits 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 some there's always these disruptive events, and so ETFs are big. But I got to say ETFs at eighty 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 van guard in Bogel credit. That's where even though he didn't like ETFs, he had this monumental impact on them. So to me, whether it's an index, spetra fund or an ETF, the bigger trend is the great cost migration. And you got to go back to Bogel on that. That said, when it comes to getting investments in a low 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. Ten twenty thirty 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. I'm Barry Ridolts. You've been listening to Bloomberg's At the Money. What I said the father as a problems. You know
you want to say it's father as the plums. I did be let it through. It's father as a plows. What I'm going to do