Vanguard Fee Cuts May Be Small, but They’re a Win for Investors

Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton.

Vanguard is reminding investors about its low-fee roots. The world’s second-biggest money manager made a historic cut this week. It reduced the expense ratios of almost 90 mutual funds and exchange-traded funds. The list includes popular passive and actively managed funds. What does this mean for Vanguard’s customers and its rivals? I checked in with Dan Sotiroff to get his insights. He’s a senior manager research analyst for Morningstar Research Services and covers the firm.

It’s good to see you, Dan.

Daniel Sotiroff: Good to see you too, Ivanna.

Vanguard Fee Cuts 2025

Hampton: I want to know, what was your reaction to Vanguard’s news?

Sotiroff: Well, overall, it’s overwhelmingly positive. I think we love fee cuts, especially being an analyst at Morningstar. It’s a direct way we can see that an asset manager is giving money back to clients at the end of the day. So overall, it’s great. There’s a little bit of nuance here that we have to unpack. First of all, fee cuts were pretty modest when you look at it on an individual share-class level. The median cut was about 1 basis point. I think the asset-weighted came out to be a little under 2 basis points per share class. So, it’s not life-changing money that these fee cuts are really doing; the impact’s going to be pretty small at the individual investor level.

I think the bigger signal here is the revenue hit that Vanguard’s taking, a $350 million hit this year. And if you think about it, it compounds over subsequent years. So, that’s a lot of revenue that they’re essentially just giving up, it’s foregone revenue that they’re essentially giving back to investors. So, usually a positive signal.

Why Is Vanguard Cutting Fees Now?

Hampton: Vanguard is already well known for charging cheap fees. Why do you think they trim them now?

Sotiroff: It’s a good question, and I hinted at this in my article that I wrote for Morningstar.com. First, the obvious, Vanguard’s been massively successful over the last couple of years, I don’t think that’s a surprise. I think when I was talking with Susan [Dziubinski, Morningstar investment specialist], I said they took in around $222 billion last year or something close to that. That was in net flows. If you look at over the past three years, the number’s even bigger, I think it’s somewhere around $530-plus billion. So, they’ve taken in a ton of revenue, and their funds are growing a lot because the market’s up. So, I think some of it was just passing on that incremental revenue to investors, as we’ve come to know Vanguard to do. I think that’s it.

Also, you have to look at the context around what’s been going on in the news. They’ve made some mistakes over the last couple of years. I think it’s safe to say I don’t think they’re intentional mistakes, they are humans, after all, and make mistakes. But they’ve got some bad PR for that, and then you throw in, you hire an outsider to come in and run the company from one of your biggest competitors, and it’s put a cloud over everything. So, is Vanguard still going to be the Vanguard that we know and loved over the last 50 years? Is that going to continue?

And so I think a little bit may have been just to buy some goodwill from their clients, too. As an analyst, I can’t overlook that. I don’t want to be the Debbie Downer, but I do have to acknowledge that. But either way, this is a great way to do it. Directly giving back a really big pile of money to investors is a really good signal to send.

Six Noteworthy Vanguard Funds and ETFs With Cheaper Expense Ratios

Hampton: And I will point the audience to the show notes. Dan, you and Susan Dziubinski talked about what’s ahead for Vanguard in 2025, so audience, check out that video. So Dan, among the 87 funds with newly lowered expense ratios, can you talk about a few that you find noteworthy?

Sotiroff: To take it back to the video I did with Susan and we were talking about Primecap because they’re the holy grail of asset management, and the funds they’re managing for Vanguard are actually open right now, so you can get access to them, which is rare. You saw 1-2 basis drops on some of those funds, so they’re also now a little bit cheaper. So, that would be Vanguard Primecap VPMAX, Primecap Core VPCCX, and Vanguard Capital Opportunity VHCAX are the three funds there. They all got, again, 1- to 2-basis-point cuts.

The other ones I was looking at were the really big ETFs, the broad market ETF-type stuff. So, Vanguard FTSE Developed Markets ETF VEA, that got cut in half. That went from 6 basis points down to 3. Total International Stock ETF VXUS went from 8 basis points down to 5. And then one of our big fan favorites, Vanguard Dividend Appreciation ETF VIG went from 6 basis points down to 5. The reason I point those out is because these are broad market ETFs, and they largely compete on fees. So, anytime you see a fee cut, that’s really notable, especially when you’re cutting the fee in half, that’s a big step.

Hampton: And among that list, any that you own?

Sotiroff: I do. I actually own FTSE Develop Markets ETF, and then the Dividend Appreciation ETF as well.

Vanguard Signals to Investors to Consider Bond Funds

Hampton: A significant number of fee cuts, targeted share classes of bond funds. What do you make of that, Dan?

Sotiroff: I think about 62 share classes out of the full list were bond funds. So, it is a little bit skewed when you look at Vanguard’s asset mix. It is really highly biased toward equity, and Jeff Ptak did a really good summary on a Substack of that. I think if you look at Vanguard’s assets, it’s about 80% equity, 20% bond, something like that right now. And Salim [Ramji, Vanguard CEO] addressed this in his interview with The Wall Street Journal. He’d like to see investors have a little bit more balance in their portfolios, just as assessed by Vanguard’s asset mix. And I think that makes sense, right? The market’s been up by a lot. We’re probably at a point where it’s overvalued, I think it’s fair to say, and it’s a little bit riskier. So, maybe incentivizing people to take on a little bit more fixed income, more stable bonds and stuff like that isn’t such a bad thing.

The other thing you have to look at is Vanguard as a business. If you can get more people into fixed income, your fee-based revenue that you’re bringing in is going to be a little bit more stable, too. It’s one of those things where it’s a win-win on both sides for the investor and for Vanguard, I think.

Is Vanguard’s New CEO Putting Pressure on BlackRock to Lower Fees?

Hampton: Vanguard’s new CEO Salim Ramji, he’s been on the job for more than six months, and he is a former BlackRock executive. Is he putting a little bit pressure on that former boss of his?

Sotiroff: It is possible, and I can see why people are reading into that. Obviously, because some of the ETFs I just mentioned are directly going up against ETFs from his former employer, so it’s a natural connection to make, and there might be some of that out there. But again, the fee cuts are pretty modest. A lot of this stuff, like both the BlackRock, the iShares ETFs, and the Vanguard ETFs, and even those from State Street, they’re already so cheap as it is, and that’s why you don’t see a lot of the bigger cuts that we’ve seen in the past is they’re so low. It’s really hard to make a 10 basis point cut when you’re only charging five. So, the math just doesn’t work out at the end of the day. So, there might be a little bit of that, but I think some of it is also just the goodwill toward clients and actually giving that money back to clients at the end of the day.

Has the ‘Race to the Bottom’ of Cheaper Fund Fees Started Again?

Hampton: Let’s keep talking about those cheap fees. Has Vanguard reignited the so-called race to the bottom of cheaper fees within the fund industry?

Sotiroff: It’s a good question, one that I’ve been getting a lot just from various media outlets and whatnot. The big question being, are we going to see the fee wars from a couple of years ago reignite? I’ve kind of said, “Well, I think they’re going to be more like fee skirmishes.” I think there are certain pockets here where there have been some gaps that emerge. I mentioned the broad international ETFs before. That was a good example where you’re starting to see some two or 3-basis-point gaps emerge between Vanguard’s ETFs and the competitors. So, it’s possible we could see a response.

What is it, Wednesday, about 10:45 in the morning, Feb. 5? So nothing yet, but we’re keeping an eye on it, it’s certainly possible. But again, I think most of it is probably going to be competitors dropping down to match where Vanguard was at.

What Lower Fund Fees Mean for Vanguard Investors in the Long Term

Hampton: I love a good Dan time stamp. Vanguard says its customers will save $350 million this year, and you mentioned that they’re going to take the hit for it. So, investors may be wondering, what do those savings look like in their portfolio? Can you talk about what lower fees could mean in the long term, Dan?

Sotiroff: It’s a statement of the obvious, I think, and probably a lot of our viewers are familiar with it. All things equal, lower fees equal higher total returns. But again, like I said before, 1 to 2 basis points is not going to be life-changing money. I think the bigger things are, the things that Christine [Benz, Morningstar director of personal finance] always talks about. The biggest things that are going to influence your long-term outcome are just your savings rate, and getting into low-fee investments, whether that be active or passive. Those are the big things that are going to drive your returns. It’s your long-term habits over time that are really going to be the big drivers.

So incrementally, this is great. I’m not going to say no to a fee cut, I don’t want to be that guy. But it’s going to be a very small benefit, it’s not life-changing money.

How Vanguard Can Keep and Grow Their Customer Base

Hampton: What else should Vanguard do or tackle to keep customers happy and win new ones?

Sotiroff: Great question. So they’re not having any issues bringing in new money. Clearly, they’re doing a great job. I think a lot of that has just been built in over time, they have a lot of great investments and low-fee investments at that. So, they’re winning in that, they’re the envy of the asset management industry in general. I think there are still some bad perceptions around the client service side of things. That’s one thing I really want to learn about when we visit them in April. We’re going to be asking some questions about that. It’s hard to distinguish perception from reality in that. There have been some issues, but how much has been fixed, it’s always hard to tell.

There’s also been this journey to modernize a lot of their technology. And we’ve seen some things happen with the app, the online interface, and stuff like that. There have been some improvements there. So clearly they’re making some headway. I don’t think they’re all the way there yet, but that’ll be interesting to learn a little bit more about in April as well. So, that’s my short list.

Hampton: All right. Well, everyone listening and watching, you can find the full list of share classes whose fees were cut, and by how much. Check out Dan’s article in the show notes. Thank you, Dan, for coming to the table.

Sotiroff: You’re very welcome, thanks for having me on.

What’s New in the Markets?

Hampton: Here’s the markets in brief for the week ahead: We’ll get updates on how consumers are faring. McDonald’s MCD is scheduled to report its fourth-quarter results on Monday, Feb. 10. Coca-Cola KO is expected to release its Q4 earnings on Tuesday. And we’ll find out which costs ticked up or down in January; the new Consumer Price Index report is due out on Wednesday.

Meanwhile, investors may be bracing themselves for market uncertainty in 2025. Where can they turn to cut through the noise? A weekly show on Morningstar.com and Morningstar’s YouTube channel helps people understand the difference between noise and signal. It’s called The Morning Filter.

The hosts are David Sekera, chief US market strategist for Morningstar Research Services, and Susan Dziubinski, investment specialist for Morningstar, Inc. Susan and Dave joined Investing Insights to talk about what’s new about their popular show.

Welcome to Investing Insights, Susan and Dave.

Susan Dziubinski: Hey, Ivanna. Thanks for having us.

David Sekera: Hey, Ivanna. Thanks for inviting us on Investing Insights.

Introducing The Morning Filter Podcast

Hampton: Of course. I get to have The Morning Filter hosts on Investing Insights. This is a fantastic day. But let’s not keep the audience waiting any longer. Susan, share the big news.

Dziubinski: Well, Dave and I have been working on The Morning Filter for two years, and happy belated anniversary, Dave. But that’s not the news. We are here to announce that the show is now available as an audio podcast, and investors can now find The Morning Filter on whichever platform they use to get their podcasts.

How The Morning Filter Brings Unique Insights to Listeners

Hampton: That’s awesome news. Susan, let’s go to you. You have been in the industry at Morningstar for over 30 years. Our audience may recognize you from your articles and videos on Morningstar.com. What unique role does The Morning Filter serve and what makes it a must each week?

Dziubinski: When we were sort of kicking around ideas for what to call the show, Dave and I were really keen on this concept of a filter because we really think that’s kind of what we do each week. We look at what’s going on in the markets through Morningstar’s filter, and we try to help investors separate the signal from noise. So, at the end of that episode, we want to help investors put market events into context. So what does that mean? Well, in each show we talk about the economic news or earnings reports that could move markets for the week ahead, but we don’t talk about them because we expect investors to buy or sell around those events. We just want investors to be prepared for what they might see in the markets in the week ahead.

We also talk about new Morningstar research, and again, this is always long-term-focused research. And then Dave will share a few of his undervalued stock ideas for investors for the week. And I think that kind of makes us different from a lot of the other investment shows out there that tend to focus maybe more on that trading around market events regardless of company fundamentals or hopping on trends at any price and so on. That’s just not us. That’s not what we’re about.

What to Expect from The Morning Filter’s Weekly Analysis of Stock Picks and Pans

Hampton: Dave, you worked at a hedge fund and banks and now you’re Morningstar’s chief US market strategist. Morningstar uses a unique framework when evaluating companies, focusing on the stock’s long-term fundamentals rather than short-term price movements. What can the audience expect when you’re giving your stock picks and pans of the week?

Sekera: When I highlight stocks that we think are either particularly undervalued or significantly undervalued as compared to our valuations, really coming at it from the perspective of Morningstar’s investment philosophy, which is to invest for the long term. So, what that means is we advocate for investing in those stocks of high-quality companies, specifically those we rate with having an economic moat, where that economic moat signifies a company’s long-term durable competitive advantages, and those competitive advantages then allow those companies to generate excess returns on invested capital over the long term. But, of course, that is only half the equation.

The other half is to identify those stocks that are trading at a significant discount to their intrinsic valuation. As you have both mentioned, we’re not traders. We’re not just trying to flip in and out of positions, trying to capture a few percent here and there, but really put money to work in those investments that we think will outperform the market over the long term.

Market Outlook 2025: What Investors Can Expect

Hampton: Dave, what’s on your radar for the year ahead that you and Susan will be talking about on The Morning Filter?

Sekera: Right now, what I’m seeing is that some of the biggest tailwinds that drove the markets in 2024 are starting to recede. For example, inflation was on a downward trend for much of 2024. Over the past couple of months, that’s certainly become sticky. Long-term interest rates were on a downward trend for much of last year, but we did see them bounce higher in the fourth quarter. Thinking about monetary policy, it appears as though that’s not going to be as easy as what people have been pricing in. And, of course, economic growth was better than expected for much of last year, but our economics team does expect the rate of growth to slow here in the first half of 2025.

But even most importantly, maybe from a market sentiment perspective, we think that spending on artificial intelligence is now shifting from increasing at an increasing rate to now increasing at a decreasing rate. But of course, we always put all of those into our filter, really focus on valuation, look to identify those areas where we think the market has maybe gotten ahead of itself, that maybe you should be looking to underweight those areas, and then identify those areas that are undervalued that you can overweight.

For example, here at the beginning of 2025, what we’re finding is that small-cap stocks are still trading at a very large discount to fair value, whereas large-cap stocks are at a premium. Value stocks, we think they’re attractive relative to growth stocks. Sectors such as energy, real estate, and healthcare, we see a lot of stocks trading at very attractive discounts, whereas other sectors such as consumer cyclicals, financials, and technology are overvalued.

How Investors and Advisors Learn From The Morning Filter

Hampton: Your audience includes everyone from the individual investor to the advisor. Each week you try to answer viewers’ questions. Susan, what are some of the most interesting questions you all have received?

Dziubinski: We really do try to incorporate our viewers into each episode as much as we can. And we’ve even done a couple of viewer mailbag episodes, but we try to address an investor question every week. And as you might expect, they sort of run the gambit. We can’t give specific investment advice about portfolios on the show, but we get a lot of questions for Dave about specific companies, very often about stocks that he hasn’t chosen as picks, more so sometimes than stocks that he has chosen. We also get a good number of questions about specific industries or market trends like, “Hey, Dave, what do you think of lithium today? Hey, Dave, what do you think of AI opportunities today?”

We also get asked a lot about Morningstar’s ratings and methodologies, specifically the economic moat rating. But from my perspective, my favorite questions are about when investors are asking generally how do you know when it’s time to sell a stock? A lot of us in finance will talk about, well, how do I identify a stock to buy? And investors seem to feel like they have a pretty good handle on that most times for themselves. But when to sell is that big question. And I think Dave does a great job of trying to provide sort of a framework from Morningstar about how to think about when it might be time to scale back into securities, wait in your portfolio, or to exit entirely. And I really think those conversations are a real value-add.

Hampton: And I expect now you’re going to get even more questions from viewers. Everyone, listen up: Go to Apple Podcasts or your favorite platform and subscribe to The Morning Filter. I have. New episodes drop on Mondays. Susan and Dave, your show is a part of my commute. I was listening this morning. Thank you for coming on Investing Insights. This has been a lot of fun.

Dziubinski: Thank you again for having us, Ivanna.

Sekera: Thank you very much.

Hampton: That wraps up this week’s episode. Thanks for watching and making this show part of your day. The Investing Insights team asks that you give our podcast five stars to help others find the work we are producing for you. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.