Vanguard boasts of squeezing $14.4b out of fees

At a time when active managers find themselves struggling, Vanguard Australia has pointed to the manner in which index funds have created significant price pressure.

Vanguard has released research from its Investment Strategy Group which estimates that investors in Australian domiciled funds have collectively saved $14.4 billion since 1998 by investing in low-cost index funds including exchanged traded funds (ETFs).

It said this reflects ongoing reductions in the asset-weighted expense ratios of Australian index funds, which averaged 22.8 basis points at the start of 2024 noting that this compared with an average asset-weighted expense ratio for Australian active funds of 90.6 basis points.

It pointed to a “tethering effect” when it comes to fund costs, with both active and index average expense ratios having decreased over time.

“Yet, despite costs having come down, the average difference in management costs between active and index funds is still substantial,” Vanguard said.

Commenting on the research, Vanguard Chief Investment Officer, Asia-Pacific, Duncan Burns said the take-up of index funds by Australian investors over the last 26 years had been phenomenal and had helped drive down costs for all investors.

“Higher investment costs diminish returns, especially for active managers who aim to outperform markets. The higher the investment costs, the higher the odds of market underperformance,” he said.

“A high percentage of investors in active funds underperform index benchmarks because their returns are eroded by high management costs.”