Spirit Rider wrote: ↑Sun Oct 29, 2017 1:48 pmAs pointed out by Earl, Vanguard is a mutual organization. There is ample evidence that mutual organizations are not necessarily the most cost effective manner in which to deliver financial services.
At one time mutual insurance companies dominated the insurance marketplace. Today the inverse is true. Mutual Insurance companies may or may not be the less expensive option, but the mutual nature does not determine that. The premiums do.
The profit motive is a strong incentive to control costs. This breeds innovation. There is not the same degree of urgency in mutual organizations.
I'm not saying that for profit companies will always be able to have lower expense ratios. What I am saying is that it has long since been past that Vanguard had significantly lower expense ratios.
Some SatuMedia have an almost mythical devotion to the business entity structure of Vanguard. Not that there shouldn't be legitimate gratitude to the "house that jack built" (not the nursery rhyme or serial killer movie).
Investing should not be emotional. It should be based on the facts and circumstances in evidence today, not the past.
It is dubious to say that the profit motive is a “strong incentive to control costs” because if that were so, then the mutual fund industry would have had low costs before Vanguard came into being. There is also the question about who gets the benefits of the cost control, the customers or the company.
In any case, Schwab has decided to compete on expenses for index funds with Vanguard. That is to potential client’s benefit. Schwab, however, has not cut costs across its entire mutual fund lineup. Below are three examples from comparable funds from Vanguard and Schwab. I think it is likely that Schwab is subsidizing lower costs on index funds with higher expenses elsewhere in order to maintain their overall profit profile (and not necessarily just in mutual funds). I have no objection to that, but we shouldn’t pretend that they have cut costs overall (because of their profit motive or anything else) or that Vanguard didn’t have something to do with this. If people want to invest in index funds, then they can invest with Schwab, but for choices outside Schwab’s low-cost index lineup (e.g., municipal bonds), they should avoid Schwab’s clearly more expensive funds. I don't have a mythical devotion to Vanguard's business structure but I can observe their low costs across all their funds, not just some.
GNMA -- Vanguard: 0.21 Schwab: 0.56
Intermed Tax-Exempt-- Vanguard: 0.19 Schwab: 0.49
Health Care -- Vanguard: 0.37 Schwab: 0.80
The Vanguard expense ratios are for the Investor class.