Archives for February 12, 2015

Costs Matter: Vanguard Long-Term Performance Update 2015

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

costsmatterThe purpose of Vanguard’s commitment to low-cost investing is not just to be cheap, it is to give their clients higher performance. Whenever a money manager charges higher fees for themselves, they will have to compensate by creating that much higher returns through whatever combination of skill or luck.

Over long periods of time, the luck tends to shake out and the higher expense ratios usually become a very hard hurdle to continually overcome. (In turn, this pressure also leads some managers to take increasingly risky bets and have luck either save their butts or lose all their client’s money!)

Taken from a recent Vanguard article, the chart below confirms this tendency. It shows the percentage of Vanguard funds in each major asset category that exceeded the average returns of their competing fund peer groups (as determined by industry-standard Lipper) over the 1-, 3-, 5-, and 10-year periods ended December 31, 2014.

vglipper_small2

Every single number on that 10-year return column is 90% or higher. Every asset class. Is that something I could interest you in?

Costco No Longer Accepting American Express in 2016

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Starting in early 2016, you will no longer need an American Express card to pay with a credit card at Costco. Not earth-shattering news (although I do buy a lot of stuff at Costco), but as a credit card geek I thought some of the details that came out were interesting:

  • American Express and Costco are ending their 16-year partnership when their current contract ends on March 31, 2016. After that, American Express will no longer be accepted at Costco wholesale stores.
  • The relationship accounted for 8% of AmEx’s revenue last year, 20% of its worldwide loans, and 10% of its cards in force. That’s a pretty sizable chunk of their business, but American Express had to offer deeply-discounted transaction fees to get it. I guess they didn’t think it was worth it anymore.
  • In Canada, Costco has already dropped AmEx and replaced them with Capital One and Mastercard. Reportedly, Costco is also in talks with CapOne and Mastercard for their US stores as well (though they state they are also talking with other issuers).
  • The co-branded Costco TrueEarnings American Express card is expected to be discontinued, and American Express will probably be offering cardholders an alternative card. It really wouldn’t make sense to keep it around if you couldn’t even use it at Costco.

Sources: WSJ, AP, Marketwatch

Chart: Vanguard Low-Cost Philosophy At Work

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

costsmatterThe debate between active and passive investing has come full circle. We’ve officially gone from “index funds will never work!” to “index funds are working too well, it can’t keep on going”. Check out the Forbes article Is Vanguard Too Successful?

Passive vs. active is just a smokescreen. You know what really works? Low costs! There was a big hubbub when Morningstar admitted that expense ratios were a better predictor of performance than their much-advertised star ratings system. Vanguard has many successful actively-managed funds and that is due both to good managers and low costs. Wellington, Wellesley, PrimeCap, they all have expense ratios that are fractions of their competitors.

In addition, what makes Vanguard special is their inherent, longstanding commitment to low costs. Look at how the asset-weighted average expense ratio of all Vanguard funds (including actively-managed funds) has dropped since their inception:

vanguardcost

Providers like Schwab and iShares all have some ETFs that are very low cost now, but they also have a duty to maximize shareholder value. If you’re a for-profit company and you think you can keep prices the same even as your assets rise, you do that. The very structure of Vanguard states that the investors themselves own the funds, which means they naturally pass on any savings onto the retail investor. (I do believe that the recent competition is good however and it keeps everyone, including Vanguard, on their toes.)

The “at-cost” investing structure is why the majority of my assets are invested in Vanguard funds and ETFs.

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