When Vanguard founder John C. Bogle introduced the first index fund in 1976, he changed the investing paradigm for individual investors by giving them access to a low-cost way of amassing wealth. Bogle’s simple intent was to make sure investors received their fair share of the market’s return. Since then, Vanguard has gathered more than $5 trillion in assets. Two-thirds of those assets are invested in index funds. Although other mutual fund companies have been trying to play catch up by adding low-cost index funds to their menus, Vanguard remains the undisputed leader. As of 2018, it offers investors several advantages that can’t be matched. These are the reasons why Vanguard index funds are unique.
Conflict-Free Ownership Structure
According to Bogle, the biggest conflict of interest in the mutual fund industry is its pursuit of profits. Most of the largest fund groups are corporate-owned and have a responsibility to maximize profits for their shareholders. To do so, they need to spend significant amounts of money on marketing and distribution to constantly expand their profit margins. Bogle sought to get rid of the conflict of interest and put investors’ interests first by eliminating the company’s profit. Instead of being owned by shareholders, Vanguard is owned by its funds, which are, in turn, owned by its funds’ investors. Any profits generated are returned to its owners in the form of reductions in cost. Bogle estimates that this unique cost structure saves Vanguard investors as much as $14 billion a year.
While other leading index fund providers such as Schwab and Fidelity try to compete with Vanguard on fees, this may not be sustainable due to their corporate cost structures. Vanguard’s low fees are baked into its cost structure. Because there is no profit motive, Vanguard has a trusted relationship with each of its clients.
Superior Index Fund Experience
Vanguard invented index funds, and it has been offering them longer than any other fund group, which makes it uniquely more experienced and knowledgeable in managing them. An index fund invests in all or a representative sample of the securities of the index it is designed to track. If it were as easy as buying all of the stocks of a particular index, then all index funds would perform the same (and not very well). Although index funds are passively managed, they require expertise and skill at selecting the particular stocks to include in the portfolio and managing their weightings to ensure they closely track the ever-changing weighting of the index. The goal is to ensure portfolio performance broadly mirrors the returns of the index over time, and Vanguard’s index funds are unparalleled in their abilities to match the performances of their underlying markets.
An Index Fund for any Portfolio
As of January 2018, Vanguard offers more than 60 index funds covering nearly every market index. The breadth of fund options allows investors to design any asset allocation strategy they need to match their investment profiles and risk tolerance. Other index fund providers offer more limited ranges of funds, which may require investors to add more expensive actively managed funds to fulfill their asset allocation needs. Novice investors can access Vanguard’s online asset allocation tool, which facilitates the design of a basic portfolio. Investors with larger amounts of assets can access Vanguard’s Personal Advisor Service, which offers a complete array of investment management and advice tools for creating customized investment plans. This service also provides access to advisors to assist in the planning and offer guidance.
For investors with less than $10,000 to invest, Vanguard index funds have some of the lowest fees in the industry. But, for investors with $10,000 or more to invest, the fees are absolutely the lowest in the industry. Many Vanguard funds offer two broad classes of funds – investor shares and admiral shares – with two tiers of investment fees. For example, the expense ratio of the Vanguard Total Stock Market Index Fund investors shares is 0.17%. For investments of more than $10,000, the Total Stock Market Index Fund admiral shares has an expense ratio of 0.05%. If you don’t have $10,000 to invest initially, Vanguard allows you to convert your investor shares to admiral shares once your account has accumulated $10,000.