Vanguard's latest decision to lean into its low-cost strength could reinforce its influence in the retail investment markets as it gains ground in key fund categories while passing significant cost savings to investors.
The fund giant made headlines on Monday by announcing a historic fee cut impacting 53 ETFs and 87 mutual fund share classes, with an average reduction of 20 percent. The firm estimates the cuts will save investors approximately $350 million this year.
While Vanguard's penchant for seeking price leadership has made it a leading force in the race to zero fees, which arguably peaked in 2019, the impact of its latest cuts will vary across fund categories, according to new research from CFRA. In a note following the move, Aniket Ullal, the firm's head of ETF research, said the move could help it steal market share in areas where rivals have an edge.
"An area where Vanguard could use fee cuts to gain market share is in US-focused sector ETFs, where the firm cut fees across 10 funds," UIlal wrote. "Vanguard is not the lowest cost provider in this category even after these latest reductions. ... However, Vanguard’s lower fee now puts it on par with the sector ETF fees of State Street, the runaway leader by assets in the U.S. sector category."
In areas where Vanguard is already the lowest-cost provider, such as core index ETFs, the move will primarily benefit existing investors while potentially strengthening its lead over competitors, he said.
Drawing from an analysis by JPMorgan, Barron's said the move will likely put pressure on other leading ETF issuers, particularly BlackRock, Schwab, and Fidelity, as fees remain a key consideration for investors. BlackRock, the largest ETF provider by assets, could face the biggest challenge if it responds with similar cuts.
JPMorgan analyst Kenneth B. Worthington laid out a worst-case scenario where BlackRock matches Vanguard’s reductions across its product lineup, which would lead to a revenue impact of $900 million, or between 3 percent and 5 percent annually, for the global fund behemoth led by Larry Fink.
“While there will certainly be a fee rate headwind for BlackRock in the years to come, we think any revenue headwind will occur over a longer period with various offsets to support earnings,” Worthington wrote.
Speaking to MarketWatch, Daniel Sotiroff, a senior manager research analyst at Morningstar, argued that the fee reductions may not significantly alter investor behavior.
“A lot of [Vanguard’s] asset classes are cutting around 1 or 2 basis points [in expense ratios], so from an investor’s or Vanguard client’s perspective, it doesn’t really change the total return they are going to eventually earn on these funds by that much,” he said.
Still, he said the reductions showcase Vanguard’s unique ownership structure – set up by its iconic founder John Bogle – as the company is owned by fund shareholders rather than outside investors. This allows the firm to pass along cost savings directly to investors, rather than focusing on generating profits for third-party owners.
“The real signal [of the fee cut] isn’t so much about an investor’s total return … but that Vanguard is still willing to take a pretty big revenue hit in the interest of helping its clients out,” Sotiroff said.
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