Vanguard has quite a unique structure in terms of investment management companies. The company is owned by its funds. The different funds of the company are then owned by the shareholders. Therefore, the shareholders are the true owners of Vanguard. The company has no outside investors other than its shareholders. Most of the major investment firms are publicly traded.
Vanguard’s structure allows the company to charge very low fees for its funds. Due to its scope of size, the company has been able to reduce its expenses over the years. The average expense ratio for Vanguard funds was 0.89% in 1975. That number is 0.09% in 2021.
Some experts believe that Vanguard’s structure allows it to avoid conflicts of interest that are present in other investment management companies. Publicly traded investment management companies must serve their shareholders and the investors in their funds.
- Vanguard Group is the second largest investment company in the world, after BlackRock.
- It is the world’s largest mutual fund issuer and the second largest ETF issuer.
- The company is unusual in the fund world in that it is owned by its various funds, which in turn are owned by the company’s shareholders.
- The company has no more owners than its shareholders, which distinguishes it from most publicly traded investment firms.
As of 2021, Vanguard has more than $ 7.2 trillion in assets under management (AUM), second only to BlackRock, Inc ($ 6.47 trillion AUM). The company is based in Pennsylvania. Vanguard is the world’s largest mutual fund issuer and the second largest issuer of exchange-traded funds (ETFs). It has 209 US funds as of 2021. It has one of the largest bond funds in the world as of 2021, the Vanguard Total Bond Market Index. Vanguard prides itself on its stability, transparency, low costs, and risk management. It is a leader in the offering of passively managed mutual funds and ETFs.
John Bogle on the launch of the world’s first index fund
Vanguard was founded by John C. Bogle as part of the Wellington Management Company. Bogle earned his degree from Princeton University. The fund grew out of a poor decision Bogle made about a merger. Bogle was removed as head of the group, but was still allowed to start a new fund. The main stipulation to allow Bogle to start the new fund was that it could not be actively managed. Due to this limitation, Bogle decided to start a passive fund that would track the S&P 500. Bogle named the fund “Vanguard” after a British ship. The first new fund launched in 1975.
Although the fund’s growth was initially slow, it eventually took off. In the 1980s, other mutual funds began to copy his style of index investing. The market for passive and indexed products has grown substantially since then.
The average expense ratio for Vanguard funds is 0.09% at the end of 2020, compared to the mutual fund industry average of 0.54%.
Benefits of indexed investing
Bogle is a strong advocate of index investing compared to investing in actively managed mutual funds. Vanguard has some of the largest index funds in the business. It states that, in general, it is impossible for actively managed funds to outperform passively managed funds. Actively managed funds charge higher fees that eat away at long-term profits. Additionally, many active fund managers fail to even outperform their benchmarks most of the time. It is estimated that between 50% and 80% of mutual funds fail to outperform their benchmarks in most years.
This calls into question the real added benefit of more actively managed mutual funds. Active fund managers need to outperform their benchmarks by an amount at least equal to the highest fees they charge, to be worth it. This is a difficult task. Even if a fund manager is successful in the short term, it is difficult to know if this is a function of luck or a real skill in the long term. Investors should note that Vanguard still has actively managed mutual funds. Even these actively managed funds strive to keep costs low against industry averages, making them a better bet for investors.
Index funds make a lot of sense to many investors. Mutual funds and ETFs that track indexes have very low costs. They must ensure that their holdings generally reflect and track the performance of the index. This translates into lower fees for investors. Even with broad indices like the S&P 500, the components of that index are chosen by trained investment professionals. If a company is in financial difficulties, it can be removed from the index. Investors still benefit from professional investment advice even when passively tracking indices.