Slash Your Investment Costs: Vanguard Reduces Fees on Many Mutual Funds and ETFs

On Monday, Vanguard announced significant cuts to the management fees of 87 of its investment funds, marking the largest fee reduction in the company’s history.

By lowering the expense ratios on a variety of its mutual funds and ETFs, Vanguard has committed to saving investors upwards of $350 million by the year 2025.

This move is part of a broader trend in the investment industry where firms are slashing the yearly costs associated with fund ownership, significantly benefiting individual investors.

“Vanguard is dedicated to adding value for our investors instead of taking it away,” Vanguard CEO Salim Ramji stated. “Reducing costs allows investors to retain a greater portion of their earnings, which compounds over time.”

As the second-largest financial advisory firm in the United States, trailing only behind BlackRock, Vanguard manages $10.1 trillion in global assets.

The firm also noted that these reduced expense ratios were effective immediately.

Understanding Expense Ratios

An expense ratio represents the yearly cost associated with owning a mutual fund or ETF, essentially serving as a management fee that investors pay to the managing firm.

This fee is calculated as a percentage of the investor’s total fund investment. For example, a 1% expense ratio means an investor pays $1 annually for every $100 invested.

According to a report by Bankrate, a personal finance website, expense ratios have been on a decline for years. The fees for stock mutual funds have dropped from 0.99% in 2000 to just 0.42% in 2023 on an asset-weighted basis, a method that gives more weight to larger funds.

Large investment firms like Vanguard and BlackRock periodically announce these fee reductions, contributing to what some experts call a “race to the bottom” as fees approach zero.

“Investors are increasingly benefiting from these lower fees,” Zachary Evens of Morningstar noted in a 2024 report.

Now, many passive funds, including index funds, boast expense ratios below 0.1%.

Conversely, actively managed funds typically have higher fees due to their managers taking a more direct role in the trading of securities.

Bankrate advises avoiding any fund with fees exceeding 1%.

The Trend Toward No-Load Funds

The ongoing reduction in expense ratios mirrors a shift towards no-load funds, which generally do not impose any fees or commissions for buying or selling shares, as reported by the Investment Company Institute, a nonprofit organization.

As of 2024, Vanguard is recognized by Morningstar as a leading provider of low-cost investment funds. Its asset-weighted expense ratio decreased from 0.09% in 2018 to 0.08% in 2023.

As a result, Vanguard clients will see even lower fees. For instance, the expense ratio for “admiral shares” of the Vanguard Windsor Fund will drop from 0.32% to 0.26%, while the institutional shares of the S&P 500 Value Index Fund will see a reduction from 0.08% to 0.05%.

Morningstar also identified three other investment firms known for their low fees:

• State Street Global Advisors, with an expense ratio of 0.14%
• iShares, a part of BlackRock, with an expense ratio of 0.16%
• Dimensional Fund Advisors, with an expense ratio of 0.24%

Vanguard is unique in that it is owned by the funds it manages, according to company officials. This structure allows it to operate at cost, particularly in its U.S. funds,” explained Daniel Reyes, head of portfolio review at Vanguard.