The Vanguard Group Inc. is one of the world’s largest investment firms, known for being the lowest-cost provider in the industry. The company was created on May 1, 1975, in Valley Forge, Pa., by founder John C. Bogle. Bogle created the company with a vision to be client-owned, with no outsiders seeking profits. He also believed that the company could succeed not by continually being the best-performing company, but, instead, by being the lowest-cost provider. As of Dec. 31, 2015, the company had more than $3 trillion in assets under management (AUM) and over 14,000 employees around the world.

Vanguard Effect

The term “Vanguard effect” was coined to reflect Vanguard’s asset growth over the last few decades. When founder Bogle created the company, he preached that beating an index time and again was too hard to do on a regular basis. Going against the industry norm, Bogle created Vanguard investments to mirror an index instead of trying to beat it. In exchange for the average returns, the investors pay very little in fees. Bogle believes that with the compounded savings achieved from low fees, the long-term returns will be much higher when compared to an actively managed investment.

Vanguard’s Competitors

Vanguard operates primarily in two categories: mutual funds and exchange-traded funds (ETFs). Vanguard offers 147 different mutual funds, ranging from money market and bond funds, to stock and balanced funds. In the mutual fund category, Vanguard’s biggest competitors are Fidelity Investments, American Funds, Franklin Templeton and T. Rowe Price. However, Vanguard differentiates itself from the other four competitors by having a lower internal cost. The other fund companies differentiate themselves through other ways, such as better actively managed performance or downside-risk measures.

Fidelity is undoubtedly Vanguard’s biggest mutual fund competitor, but the two have very different value propositions. One of Fidelity’s most popular funds is the Fidelity Growth Company Fund (FDGRX). The fund has been run by Steven Wymer since 1997 and is considered a large-cap growth fund. Over the past 10 years, investors received an average return of 9.72%, as of June 30, 2016. However, the fund charges an annual expense ratio of 0.88%. To compare, Vanguard has a large-cap growth fund called the Vanguard Growth Index Fund (“VIGAX”). The fund employs an index approach to investing but with a significantly lower cost of 0.08%, or 0.80% lower than the Fidelity fund. However, the fund did not achieve the same 10-year performance, lagging by 1.05% with an annual return of 8.67%.

On the ETF front, Vanguard has several competitors, such as iShares by Blackrock, State Street Global Advisors and PowerShares. iShares is currently the leader in the ETF industry and offers 342 different solutions for its clients. Vanguard, on the other hand, only offers 55 ETFs and stays away from more thematic and style-specific ideas in favor of more broad-based funds.

To compare apples to apples: both iShares and Vanguard offer health care sector ETFs. The iShares U.S. Healthcare Providers ETF (IHF) has an expense ratio of 0.43%. As of June 30, 2016, the fund had a 10-year annual average return of 10.19%. The Vanguard Health Care ETF (VHT) had an expense ratio of 0.09%, or 0.34% lower than the iShares fund. In addition to the considerably lower expenses, the Vanguard fund outperformed the iShares fund by 1.13%, with an average return of 11.32%.

Vanguard’s Clientele

Vanguard has grown immensely in popularity with the development of both the internet and the discount brokerage. Historically, individual investors needed to rely on the services of a financial advisor at a major brokerage firm to invest. With investment companies making technology easier and marketing directly to the individual investor, they have cut out the need for the major brokers. Most of Vanguard’s clients are considered do-it-yourself investors who believe that investing in an index is more effective than using a money manager.

Vanguard has a very user-friendly website that allows its clients to buy and sell investments with ease from their own computers or mobile phones. For those who are less technologically savvy, Vanguard has a team of specialists that can assist clients in every task, from opening an account to rolling over an IRA.

Investors who believe in passive, index investing with low fees would do well to look at Vanguard as a possible fit.

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