Eric Balchunas, an ETF analyst at Bloomberg Intelligence, dives into the critical impact of investment fees on long-term returns. He highlights the trend towards fee reductions and the emergence of zero-fee ETFs, making them appealing to investors. The conversation reveals how even marginal fee differences can lead to significant growth over time. Balchunas also discusses the evolution from mutual funds to ETFs, emphasizing their lower costs and greater tax efficiency, ultimately suggesting that savvy investors should prioritize fee management for optimal performance.
The dramatic reduction in ETF fees over the last decade, termed the 'great cost migration', significantly enhances investor savings and returns.
Vanguard's influence on mutual fund fee reductions has revolutionized investment accessibility, driving competitors to adopt lower-cost strategies to stay relevant.
Deep dives
The Trend of Falling ETF Fees
ETF fees have been consistently decreasing over the past decade, with some ETFs now charging nearly zero fees. This fee reduction trend, described as the 'great cost migration,' significantly benefits investors, as entrenched competition among providers has driven prices down to rock-bottom levels. For instance, an ETF with a fee of 3 basis points costs a mere $3 annually for a $10,000 investment, which shows the extreme affordability that has become the norm in the market. As fee pressures continue, savvy investors can expect to see even greater savings and enhanced returns from their investments.
The Vanguard Effect on Market Fees
The Vanguard Group has played a pivotal role in the reduction of mutual fund fees, leading to significant savings for investors, estimated at around a trillion dollars due to their influence. By attracting massive assets under management with ultra-low fees—such as their average of 9 basis points versus the industry average of around 65 basis points—Vanguard has forced other firms to follow suit to remain competitive. This phenomenon has made investment strategies more accessible, prompting firms like Fidelity to adapt by offering lower-cost index funds. As the trend continues, it is anticipated that collective savings from fee reductions could soar into the trillions in the coming decades.
ETFs as the Preferred Investment Vehicle
ETFs have emerged as the preferred investment vehicle due to their efficiency, lower costs, and convenience compared to traditional mutual funds. Unlike mutual funds that accumulate and manage investments once daily, ETFs offer traders the flexibility to buy and sell throughout the day, enhancing their appeal in fast-paced markets. Furthermore, the structure of ETFs allows for greater tax efficiency and lower trading costs, positioning them as an innovative alternative akin to the shift from physical CDs to digital formats in music. As investment landscapes evolve, the ETF model represents a significant advancement in providing investors with better performance and easier access to diverse market opportunities.
Fees matter more than you think. Over the long term, the difference between a few basis points can turn into real, big money. On this episode, Bloomberg Intelligence ETF analyst Eric Balchunas joins Barry Ritholtz to discuss how fees can significantly impact your portfolio.