The Vanguard Group Inc. has been shouting about the benefits of low-cost investing since the firm was founded nearly 40 years ago, but the message has never resonated with investors more than today.
Vanguard has never struggled to attract investors, but the success that it has had this year is unprecedented. One of every three dollars invested in mutual funds and exchange-traded funds through the first four months of the year went to Vanguard, according to Morningstar Inc.
The firm's $65 billion in total inflows are nearly four times that of the next closest mutual fund company, Pacific Investment Management Co. LLC, with $16 billion.
What is notable about Vanguard's success so far this year is that the firm isn't doing anything differently than it has done in the past.
Although a lot of fund companies are focused on rolling out new funds in alternative asset classes to lower volatility and increase diversification, Vanguard's top sellers have been old-fashioned stocks and bonds, such as the $20 billion Vanguard Total Stock Market ETF (VTI) and the $16 billion Vanguard Total Bond Market ETF (BND).
The Total Stock Market ETF has an expense ratio of 0.06%, and the Total Bond Market ETF has an expense ratio of 0.1%. By comparison, the average broad market stock ETF charges 0.43%.
“We're a competitive company, but we also have loads of perseverance and patience when it matters,” said Martha King, managing director of Vanguard's financial advisory services division.
Instead of focusing on trendy new products, Vanguard has continued to preach the benefits of a traditional diversified portfolio of stocks and bonds — and keeping costs down.
It is those meat-and-potatoes assets that the firm is targeting, Ms. King said.
“The core is where you have the majority of assets, and that's where investors are expecting the lowest-possible-cost products,” she said.
FIRM'S DNA
Low costs have been in Vanguard's DNA since its beginning.
When John Bogle founded Vanguard in 1975, he structured it so that the shareholders of the mutual funds are the owners of the company. That has helped keep costs low, because shareholders pay only the costs of operating the funds.
The perseverance in pushing Vanguard's mantra that “cost matters” is paying off now because of investors' increased attention to the bottom line.
Worries persist over equities, thanks to trouble in Europe and sluggish growth in the United States, and low interest rates have leveled bond yields.
“Costs matter more when expected returns are low. If you're expecting only a 2% or 3% return, a 1% fee seems a lot more expensive,” said Mike Rawson, an ETF analyst at Morningstar.
“If you pay less in fees, you're going to get higher returns. They go hand in hand,” said Rick Ferri, founder of wealth management firm Portfolio Solutions LLC.
Success begets success for investors in Vanguard's low-cost funds. Vanguard has cut the expense ratio on 29 of its ETFs since December because of rising asset levels in the funds, making the cheap even cheaper.
The $50 billion Vanguard MSCI Emerging Markets ETF (VWO), which already was the cheapest emerging-markets ETF, had its expense ratio cut 20% to 0.2% this year. The average emerging markets ETF charges 0.64%.
On top of low rates, Vanguard is getting a boost from the seismic shift toward fee-based investing and a crisis in confidence in active management.
“It's becoming more and more clear that it's difficult for a manager to consistently outperform,” Mr. Rawson said.
“Advisers don't want to spend time figuring out who the best manager is,” Paul Hatch, head of investment strategy and client solutions at Morgan Stanley Smith Barney LLC, said two weeks ago at an Investment Conference Institute panel on the evolution of mutual fund distribution.
He predicted that ETFs will be the driving force behind the growth in fund assets at MSSB, for that reason.
Vanguard isn't the first firm to find itself inside a perfect storm that lifts it above the rest of the asset management industry, though.
THE MIGHTY CAN FALL
During the mid-2000s bull market, Capital Research and Management Inc.'s
American Funds rose to the top of the fund industry food chain, thanks to the outperformance of its actively managed funds.
From 2003 to 2007,
American Funds saw $347 billion of new investments come through its doors. It hasn't fared nearly as well in the five years since, as its funds failed to match their bull market performance after the financial crash in 2008.
Although Vanguard doesn't have to worry about its mutual funds and ETFs beating benchmarks, because the funds are tracking them, there is the chance that investors could migrate back to actively managed funds if another bull market erupts.
To hedge against that, Vanguard is counting on the financial adviser community. The firm is in the midst of doubling its sales force and putting them out into the field to meet advisers for the first time.
It is too soon to tell whether that has had any effect on Vanguard's market share, Ms. King said.
“We wouldn't be doing it if we didn't think we could get a bigger share of the adviser market,” she said.
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