Vanguard has a fairly unique structure in terms of investment management companies. The company is owned by its funds. The company’s different funds are then owned by the shareholders. Thus, the shareholders are the true owners of Vanguard. The company has no outside investors other than its shareholders. Most of the major investment firms are publicly traded.
Vanguard's structure allows the company to charge very low expenses for its funds. Due to its scope of size, the company has been able to reduce its expenses over the years. The average expense ratio for Vanguard funds was 0.89% in 1975. That number stands at 0.09% in 2021.
Some experts believe Vanguard’s structure allows it to avoid conflicts of interest that are present at other investment management firms. Publicly traded investment management firms must cater to their shareholders and the investors in their funds.
- Vanguard Group is the second-largest investment firm in the world, after BlackRock.
- It is the biggest issuer of mutual funds worldwide and the second-biggest issuer of ETFs.
- The company is unusual in the fund world in that it is owned by its different funds, which are in turn owned by the company's shareholders.
- The company has no other owners than its shareholders, which sets it apart from most publicly-traded investment firms.
As of 2021, Vanguard has more than $7.50 trillion in assets under management (AUM), second to BlackRock, Inc ($9.01 trillion AUM). The company is headquartered in Pennsylvania. Vanguard is the largest issuer of mutual funds in the world and the second-largest issuer of exchange-traded funds (ETFs). It has 209 U.S. funds as of 2021. It has one of the largest bond funds in the world as of 2021, the Vanguard Total Bond Market Index. Vanguard prides itself on its stability, transparency, low costs, and risk management. It is a leader in the area of offering passively managed mutual funds and ETFs.
John Bogle on Starting World's First Index Fund
Origins of Vanguard
Vanguard was founded by John C. Bogle as part of the Wellington Management Company. Bogle earned his degree from Princeton University. The fund grew out of a bad decision Bogle made on a merger. Bogle was removed as the head of the group, but he was still allowed to start a new fund. The main stipulation of allowing Bogle to start the new fund was that it could not be actively managed. Due to this limitation, Bogle decided to start a passive fund that tracked the S&P 500. Bogle named the fund "Vanguard" after a British ship. The first new fund launched in 1975.
Although the growth of the fund was initially slow, the fund eventually took off. By the 1980s, other mutual funds began copying his index investing style. The market for passive and indexed products has grown substantially since that time.
The average expense ratio of Vanguard's funds is 0.09% as of the end of 2020, versus the mutual fund industry average of 0.54%.
Benefits of Index Investing
Bogle is a big proponent of index investing compared to investing in actively managed mutual funds. Vanguard has some of the largest index funds in the business. He states that it is generally impossible for actively managed funds to beat passively managed funds. Actively managed funds charge higher fees that eat into profits over the long haul. Further, many active fund managers fail to even beat their benchmark indexes most of the time. It is estimated that 50% to 80% of mutual funds fail to beat their benchmark indexes in most years.
This calls into question the real added benefit of most actively managed mutual funds. Active fund managers must beat their benchmarks by an amount at least equal to the higher fees that they charge, in order to make them worthwhile. This is a difficult task. Even if a fund manager is successful in the short term, it is difficult to know whether this is a function of luck or actual long-term skill. Investors should note that Vanguard still does have actively managed mutual funds. Even these actively managed funds strive to keep costs low versus industry averages making them a better bet for investors.
Index funds make a lot of sense for many investors. Mutual funds and ETFs that track indexes have very low costs. They must ensure that their holdings generally reflect and track the performance of the index. This results in lower fees for investors. Even with broad indexes such as the S&P 500, the components of that index are chosen by skilled investment professionals. If a company is in financial difficulty, it can be dropped from the index. Investors still benefit from professional investment advice even when they are passively tracking indexes.