Mutual Fund and ETF Issuers Competing on Fees

In March, we posted a graph of the returns and fees of the 25 largest funds by net assets and called attention to the striking difference in fees between funds offered by the Vanguard Group and those offered by American Funds. While both had very similar 5-year annualized total returns, the Vanguard funds had significantly lower fees.

Today the Wall Street Journal ran an article about how Vanguard's funds have attracted net inflows of $452 billion from January 2008 to June 2012, while American Funds' have seen net outflows of $200 billion over the same period. The author, Tom Lauricella, attributes the difference to a change in investors' strategies:

For many financial advisers, especially those at the big brokerage houses, gone are the days of claiming to "add value" for clients by finding market-beating fund managers. Instead, the firms are emphasizing smart shifts among different types of holdings.

And they are gravitating to what was once unthinkable: getting exposure to desired segments through lower-cost index-based portfolios, often through ETFs.

The article goes on to describe how American Funds remains reluctant to offer lower-cost ETFs in place of its usual mutual fund investments because of their increased transparency, which "would tip off the market to the firm's trading." But in a market environment when actively managed funds frequently underperform passive index funds, the difference in fees alone could be what is moving investors towards the lower-cost Vanguard funds, as many of the article's commenters have pointed out.