Vanguard has a fairly unique structure for an investment management company. The company is owned by its funds; the funds are owned by the shareholders. This means that its shareholders are the actual owners. Unlike most publicly-owned investment firms, Therefore, Vanguard has no outside investors other than its shareholders.
Vanguard's structure allows the company to charge very low expenses for its funds. Due to its scope, the company has been able to reduce its expenses over the years. The average expense ratio for Vanguard funds was 0.89% in 1975. As of the end of 2022, that number stands at 0.09%.
Key Takeaways
- Vanguard Group is the second-largest investment firm in the world after BlackRock.
- It is the biggest issuer of mutual funds worldwide and the second-biggest ETF issuer.
- Vanguard is owned by its different funds, which are owned by its shareholders.
- The company has no other owners than its shareholders, which sets it apart from most publicly traded investment firms.
John Bogle on Starting World's First Index Fund
About Vanguard
As of March 31, 2023, Vanguard has $7.6trillion in assets under management (AUM), making it second only to BlackRock, which boasts $9. trillion in AUM.Headquartered in Pennsylvania, Vanguard is the largest mutual funds issuer in the world and the second-largest issuer of exchange-traded funds (ETFs).
It has 203 U.S. funds and 227 international funds as of the end of 2022. The firm boasts more than 50 million investors. It also has one of the largest bond fundsin the world, the Vanguard Total Bond Market Index Fund (VBTLX).
Vanguard's mission is to "take a stand for all investors, to treat them fairly, and to give them the best chance for investment success." It prides itself on its stability, transparency, low costs, and risk management. It is a leader in offering passively managed mutual funds and ETFs.
Some experts believe Vanguard’s structure allows it to avoid conflicts of interest present at other investment management firms. Publicly traded investment management firms must cater to their shareholders and the investors in their funds.
History of Vanguard
John C. Bogle began working for the Wellington Management Company in 1951. Through his years at the company, he held various positions before becoming an executive and eventually president. Following a dispute with a merged company in 1974, Bogle formed a new company called The Vanguard Group of Investment Companies. He named the new company Vanguard after a British ship because he admired the leadership theme it embodied.
Bogle created the First Index Investment Trust in 1976, now known as the Vanguard 500 Index Fund (VFIAX). Although the fund's growth was initially slow, it took off. By the 1980s, other mutual funds began copying his index investing style.
Bogle created Vanguard and molded it into a place where retail and individual investors could turn to build wealth without needing the services of a broker and the expenses charged by them. His vision was low-cost investing and transparency for non-institutional investors.
Vanguard now has some of the largest index funds in the business.
The average expense ratio of Vanguard's funds was 0.09% as of 2022. That's significantly lower when you compare it to the mutual fund industry average of 0.54%.
Advantages and Disadvantages of Index Investing
Advantages
Index funds can charge lower fees because, with few exceptions, they track an index that is only changed if a stock listed on the index no longer meets the criteria for being listed. This means index funds are passively managed and don't need as much attention as those that don't track indexes.
It's easier for new investors. New investors, or those with limited capital, knowledge, and time, benefit from index funds because there is no need to analyze stocks to find ones that suit them. Stocks on indexes have already gone through rigorous evaluation and weighting. Investors can easily read through the prospectus and reports and find funds that fit their interests and goals.
Index investing is less expensive. Apart from fees, index funds have much less turnover than actively managed funds. This keeps the investors from having several taxable events and racking up capital gains without cashing in their stocks.
These funds can provide diversity that funds full of hand-picked stocks may not. Index funds let you hold stocks from hundreds of companies rather than focusing on a few from one industry or company.
This strategy tends to beat funds that are actively managed. Passively managed funds beat those that are actively managed because of the associated fees and additional costs. Returns may not always be higher with index funds, but for the most part, active fund managers fail to beat benchmark indexes most of the time. For example, just over half of active funds underperformed the S&P 500 over a one-year period. That number jumps up to over 91% over 10 years.
Disadvantages
The returns are limited to those of the underlying index. That's because index funds attempt to mimic index returns. In that respect, their returns are limited to the index returns.
There is a lack of reactive ability. Because you're investing in a fund that mirrors an index, you cannot act on undervalued or overvalued stocks within the fund.
Short-term investors are exposed to downside risk with index funds. Investors who don't invest in index funds for the long term might see decreased returns or even losses. Most index funds are best for long-term buy-and-hold strategies.
Index investing limits strategy exposure. Index fund investing tends to limit the investment strategies you're exposed to. Your strategies are limited to that of the fund and index managers unless you have included the index fund as part of your overall strategy.
Pros
Lower fees
Easy for new investors
Less expensive
Diversity
Beat actively-managed funds
Cons
Returns limited to those of the underlying index
Lack of reactive ability
Downside risk for short-term investors
Limits personal strategies
Who Is the Major Shareholder of Vanguard Group?
According to the Vanguard Group, the company is owned by its member funds, which are owned by the fund shareholders. Thus, the fund shareholders are the owners of Vanguard.
Is Vanguard Owned by Its Investors?
Vanguard is owned by its member funds, which are owned by fund shareholders. Therefore, someone that has purchased shares of a Vanguard fund is a Vanguard owner.
What Companies Does the Vanguard Group Own?
Vanguard's owners are its funds' shareholders. If a fund holds shares of a company, then that fund and the fund's shareholders are owners of the company whose share is held. So, Vanguard doesn't own any companies; the fund's shareholders do.
The Bottom Line
Index funds make a lot of sense for many investors. Mutual funds and ETFs that track indexes have very low costs. They must ensure that their holdings generally reflect and track the index's performance. This results in lower fees for investors, and in Vanguard's case, gives them ownership of the company helping them invest.
The stocks listed on broad indexes such as the S&P 500 are chosen by skilled investment professionals. This means that index fund investors are receiving and benefitting from professional investment advice by passively tracking indexes without even talking to an advisor.
