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What is it with Vanguard? I've heard the name come up a bunch, but I don't know why this particular company is getting all the good free press...

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4 Answers 4

up vote 29 down vote accepted

Wikipedia says it best:

Vanguard is unusual among mutual-fund companies since it is owned by the funds themselves. In this structure, each fund contributes a set amount of capital towards shared management, marketing, and distribution services.

In other words, the company is owned entirely by the shareholders of the funds in the company. The result is that Vanguard usually has the lowest cost index funds.

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The lowest cost is a big part of it. –  C. Ross Feb 7 '11 at 16:34
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The low costs are nice, but what I like best is that this structure keeps interests of the unitholders and fund company aligned. That's the reason for the low costs. –  Chris W. Rea Feb 7 '11 at 17:59
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And if a 1% fee from the other guy doesn't sound like a lot, consider that your returns are probably around 4-8% (depending on how aggressive you are with your portfolio). That's up to a quarter of your returns. It's hard to earn that back consistently in another type of fund. –  fennec Feb 8 '11 at 3:23
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@BenK Re: "If Vanguard decides to charge higher [fees] [...] the company earns more money." Yes, investors would pay higher fees; Vanguard the company would show a profit; but the company that profits is owned by its funds! "The Vanguard Group is owned by Vanguard’s U.S.-domiciled funds and ETFs." The profit would benefit the Vanguard funds that own Vanguard the company, and by extension the holders of units of those funds (you, me, pension funds, whatever.) Think of Vanguard the company as like any other ETF holding, except not publicly traded, and only held by Vanguard funds. –  Chris W. Rea Jan 15 at 20:46
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@BenK So, I hope I've demonstrated one need not worry about Vanguard the company profiting from higher fees when investing in their funds. However, as an exercise, I suggest you look up "agency costs". i.e. Vanguard management could, in theory, still benefit from higher fee revenue, not by creating a profit, but by using artificially higher fees to cover higher-than-justified expenses. Imagine a bunch of executives raising costs just to give themselves a big bonus or a outsized salary. One would hope corporate governance is good, too. –  Chris W. Rea Jan 15 at 20:55

I'll rain on the parade because I'm a cynical jerk. :)

Vanguard is at top of mind because they were the first provider of index funds and they spend a TON of money on advertising and public relations to establish themselves as THE provider of inexpensive investments. John Bogle is probably the only mutual fund founder that has held semi-celebrity status for decades... he's like the Steve Jobs of index funds.

That said, they also happen to be a company that is good at what it does.

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Fair enough, but several Charles Schwab advisors feel it's OK to phone me at home, spam me, send me huge portfolio ads by mail, etc. they call it "personalized services". Plus, I don't see Vanguard with Super Bowl ads, while Schwab ads are common everywhere... –  Ash Machine Sep 21 '11 at 22:00

Vanguard is where John Bogle started creating Index Funds. When investors think of low cost index funds, Vanguard is typically the first to come to mind.

From Wikipedia:

John Bogle graduated from Princeton University in 1951, where his senior thesis was titled: "Mutual Funds can make no claims to superiority over the Market Averages." Bogle wrote that his inspiration for starting an index fund came from three sources, all of which confirmed his 1951 research: Paul Samuelson's 1974 paper, "Challenge to Judgment", Charles Ellis' 1975 study, "The Loser's Game", and Al Ehrbar's 1975 Fortune magazine article on indexing. Bogle founded The Vanguard Group in 1974; it is now the largest mutual fund company in the United States as of 2009.

Also from the same quote, Vanguard is "now the largest mutual fund company in the United States as of 2009."

Being the biggest gives you a lot of name recognition.

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I've been a Vanguard client for more than 40 years. My reasons? Wide selection of high quality funds; low costs; excellent service. On the other hand, this is not a place for people who need advice. At Vanguard, you are your own adviser. They provide ample information, but the responsibility is yours.

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protected by John Bensin Aug 3 '13 at 15:55

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