Chapter 1: What is the main topic discussed in this episode?
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Let's keep this conversation going now with Salim Ramji. He is the CEO of Vanguard. Salim, it's great to have you with us on our relaunch day. Let's start with some news out of you this morning that Vanguard unleashing another round of fee cuts. It'll take your average asset weighted fee down to six basis points from seven basis points. That's right.
I'm going to ask you the question that I always do, and that is what the decision tree looks like between continuing to lower fees versus investing some of that money back into the business.
Well, first of all, it's great to be here, and so thank you all for having me. Yeah, it was a very unoriginal act from Vanguard because it's the, by our count, it was the 2,200th time in which we've announced fee cuts since our founding. And because of our client ownership structure, Katie, as you know, we don't have any outside stockholders or any internal owners.
And so whenever we generate a surplus, like we did last year, we're able to do a couple of things.
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Chapter 2: What recent changes did Vanguard announce regarding ETF fees?
First, we're able to invest back into important technologies and important things for the long-term health of the company. And I could talk a little bit more about how we did that. As well as, we're able to give clients back a better deal through reduced fees. And that's exactly what we announced this morning. But last year's extraordinary growth in the markets allowed us to do both.
Salim, so obviously a lot of the fee cuts were on the passive funds and they are, as we say, dirt cheap. You guys have been launching nothing but active funds, though, for the past couple of years. And I got to ask, you know, you are pushing active. You know, the founder, Jack Bogle, was pretty savage towards active. How are you trying to sell active being known as the passive ETF issuer?
Well, there are a couple of things in there, Eric. First of all, you know, Bogle's cost matter hypothesis really put into the central kind of focus for us that it's costs that matter.
Chapter 3: How does Vanguard determine the balance between fee cuts and reinvestment?
We run active funds, we run index funds, and Bogle launched more active funds during his tenure than all of his successors combined. But what we really see opportunity in is to be able to help investors keep more of what they earn. So we certainly see opportunities of that in index, and you saw that in a large portion of the cost reductions we announced today, but also last year.
But if I can just underscore, costs matter in active management as well. And so if you just take an example of our fixed income or our active fixed income, we charge 11 basis points for our active fixed income. 88% of our active fixed income outperforms its peers over a 10-year period. And that's not a coincidence.
What it means is that because we have a lower fee hurdle to overcome, it allows our investors to be much more disciplined about the investments that they're making, the risks that they're taking, whether it's around credit, whether it's around rates. And that's how our teams are able to put up kind of numbers like 88% outperforming over a 10-year period.
And so we think the underlying piece is really that costs matter. There are a lot of people that come on this show that talk about performance, but if you look at one of the biggest predictors of long-term performance in active management, as well as in index management, it really is about the cost you charge.
And Bogle had a great line, which I'll repeat, which is that in investing, you get what you don't pay for. And that's been true in active, and that's been true in index, and it's something that we believe really quite firmly here at Vanguard.
So costs matter, but service matters as well.
And Jeff DeMasso, who is the editor of the Independent Vanguard Advisor, has written that, sure, many Vanguard investors would happily take the fee reduction that you have just announced today, but they'd also happily let Vanguard keep that extra basis point if it meant better technology and better service, specifically technology and the ability to transact easily, smoothly, flawlessly on the brokerage platform.
How do you respond to that?
Yeah, I think the good thing about last year's positive result for clients is that we've been able to invest behind both. So alongside the fee reductions, we're also increasing our investments back in our client and our client service by more than half. Last year, J.D. Powers rated us number one in DIY client satisfaction.
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Chapter 4: What role do costs play in active versus passive fund management?
And I think it's going to serve investors well for the long term.
All right, Salim, that's a good place to leave it. Really appreciate your time today. Big day for you with the fee cuts. Big day for us with the relaunch. So really appreciate it. That is Vanguard CEO Salim Ranji. Thanks for having me. Thank you.