The late Jack Bogle, founder of Vanguard, did more to help the individual investor than anyone in history. And since this week marks the 50-year anniversary of Vanguard’s founding, I thought it would be nice to illustrate the unrivaled impact that Bogle had on the investment industry.
And when I say “unrivaled,” I’m not exaggerating. As Eric Balchunas estimated in The Bogle Effect, “the sum of the savings is currently more than $1 trillion and growing exponentially.” Balchunas got to this $1 trillion figure by adding up the estimated savings amounts across four different categories. Let’s look at each now.
How Vanguard Saved Investors $1 Trillion (and Counting)
Lower Expense Ratios ($300 Billion)
An expense ratio is the fee you pay to the fund company to own a fund. For example, Vanguard’s popular S&P 500 index fund, VOO, currently has an expense ratio of 0.03%. In other words, you would pay $3 per year for every $10,000 you invested into VOO.
Well, Vanguard’s fund expense ratios have been roughly 0.6% lower than the rest of the industry, on average over time. You can see this in this chart below from Balchunas:
When you multiply this fee difference by Vanguard’s assets over time and sum it up, the cumulative difference in fees comes out to around $300 billion. That’s $300 billion in fees that Vanguard investors saved by owning Vanguard funds rather than the typical active fund.
Lower Portfolio Turnover ($250 Billion)
Portfolio turnover is the act of trading or “turning over” a portfolio. Active funds have much higher turnover than passive funds, on average, because they tend to trade more. In particular, Balchunas notes, “Active mutual funds have an average turnover that is approximately 50 percent points higher than that of a Vanguard fund.”
And all that extra turnover increases costs. Historically, Balchunas estimates that an extra 1 percent in portfolio turnover leads to an extra 0.01% in costs. So, if you take Vanguard’s assets each year and multiply by its lower average portfolio turnover, the total savings come out to $250 billion. That’s literally a quarter of $1 trillion saved in transaction costs!
But lower expense ratios and lower trading costs aren’t the full story. These are just the savings generated by Vanguard investors holding Vanguard funds. In reality, Vanguard’s impact goes far beyond its own assets under management.
The Active Vanguard Effect ($200 Billion)
Vanguard’s impact on the investment industry isn’t just in the lower expense ratios that they charge, but also the lower expense ratios that other firms charge to compete with them. Balchunas coined this The Vanguard Effect. The Vanguard Effect has two sides, an active side and a passive side.
On the active side, the average active fund fee dropped from 0.99% in 2000 to 0.66% by 2021. If we take the total assets in active funds over this time period and multiple by the drop in fees, the savings to individual investors adds up to around $200 billion. That’s an additional $200 billion in investors’ pockets that would have gone to fund companies instead.
But the Vanguard Effect has a passive side as well.
The Passive Vanguard Effect ($250 Billion)
As Vanguard funds gained market share over time, many of its competitors copied its low pricing to compete and capture assets that likely would’ve gone to Vanguard. If we assume that all the assets in low-cost, non-Vanguard index funds today would’ve be in active funds instead (but for Vanguard), then these investors would’ve paid an additional $250 billion in fees as a result.
In total, the Vanguard Effect (on the active and passive side) has saved investors nearly half a trillion dollars in total fees. They did this by forcing other firms in the industry to lower their fees to stay competitive. You might think this is an exaggeration, but it isn’t. Vanguard has always been the pricing leader and hasn’t exploited this position for its own gain.
You can most clearly see this in this magnificent chart (from Balchunas) showing Vanguard’s market share of industry assets versus its market share of industry revenue from 1990 to 2020:
I’ve never seen a chart like it. How many firms can you name that have captured an increasing share of their market without capturing a increasing share of its revenue over time? I know of none.
This is the power of Vanguard at work. The growing wedge between Vanguard’s share of industry assets and its share of industry revenue represents money saved by individual investors like you and me. And those savings total over $1 trillion today.
But, the best part is that these savings continue to grow (and compound) over time. Every year that retail investors utilize low cost index funds is another year of fees saved. And underneath these savings is a much bigger philosophy.
The Power of Minimal Extraction
I tell the story of Bogle and Vanguard because they both embody a principle that I greatly admire—be minimally extractive. In other words, create a lot of value, but capture only a small fraction of it.
This is the opposite of the typical career advice. You usually hear that you should maximize your value and get every last penny in a negotiation. You rarely hear the opposite. You rarely hear that you should leave some money on the table so that everyone else wins more as a result.
This is what makes people like Jack Bogle so remarkable. Bogle could’ve greatly enriched himself while building Vanguard. He could’ve saved investors a lot of money and still made himself into a billionaire, but he didn’t. Instead, he choose a different path that gave more of the benefits to everyday investors. Today, you and I are the beneficiaries of Bogle’s vision.
There are others who have been minimally extractive to the benefit of millions too. One prominent example is Craig Newmark, the founder of Craigslist. Similar to Bogle, Newmark could’ve made far more money off of Craigslist, but he didn’t. He lets that value accrue to Craigslist’s users instead.
My goal with my writing has been to be minimally extractive as well. Though I haven’t created as much value as Bogle or Newmark, I’ve tried to give away as much of my content for as cheaply as possible. Most of my work you can read for free (albeit with ads) on this blog. However, if you want to read my writing in a more structured, higher quality format, then I have a few books for sale.
But that’s it. I’ve tried to make money through writing in the most honest, minimally extractive way possible. It’s the thing that I pride myself on the most. Not my pageviews, book sales, or follower count.
No, the thing I value the most is that I’ve been writing for 8 years and haven’t sold my soul. I’ve turned down hundreds of brand partnerships, affiliate deals, memecoins (lol), and more because they weren’t a good fit for individual investors.
Don’t get me wrong, I’m no Mother Theresa. I want to make money as much as the next person. But I’m not willing to sacrifice my integrity to do so. That’s what really matters. I can look in the mirror every day knowing that I did things my way.
And, because of readers like you, it’s working. It’s been the honor of my life to write for all of you. So, as always, thank you for reading.
Lastly, a special shout out to Eric Balchunas for inspiring this post with his incredible book The Bogle Effect. Go check it out.
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This is post 448. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
