Vanguard Has Seen More Inflows than All Competitors Combined

In the last three calendar years, investors have poured $823 billion into low-cost index and ETF funds managed by Vanguard, about 8.5 times as much as all of its competitors combined, according to a recent New York Times article.

The article quotes Morningstar’s Alina Lamy, who says this type of flow is unprecedented. “Since the crisis,” she says, “investors have been saying, ‘I may not be able to control the market, but I can control how much I pay in mutual fund expenses.'”

The phenomenon, coined the “Vanguard effect,” has “come as an existential shock to a mutual industry that has long been resistant to change,” the article argues. William McNabb, Vanguard’s chief executive, says the shift is more than a move from active to passive investing, but rather a movement from high cost to low-cost investing. Since 1976, according to the article, fees on Vanguard funds have fallen to about 0.12 percent from about 0.70, while the average fee (data from Lipper) for all mutual funds is currently around 1 percent.

The massive inflow of funds to Vanguard, however, has caused some operational glitches for the fund giant due to its spartan, no-frills culture, the article says. Daniel Wiener, editor of the Independent Adviser, a newsletter for Vanguard investors, says he has fielded complaints regarding customer service issues. “Most companies when they are growing spend more,” says Wiener, adding, “Vanguard is trying to spend less. At some point, cutting costs will bite you.” That said, according to the article, “Vanguard’s ability to attract and run so much money with so few people has been a cause for envy and disbelief.”