How a series of victories over Vanguard for 12 years makes it the Amazon of Wealth Management



Economist Burton Malkeil called the index fund "the most important financial innovation created for the individual investor". A look at the performance of pioneer Vanguard index funds over the last decade shows that many individual investors agree.

According to Morningstar data, over the last 12 years, Vanguard has cashed more money in net worth than any other fund company. Only one other company, BlackRock

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The iShares subsidiary has been listed every year since 2007 as one of the top five recipients of the net flow. Since then, with nearly $ 2 trillion in netbacks, Vanguard has attracted more than double the amount invested by iShares over the past 12 years.

Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, called Vanguard "the Amazon of Wealth Management", discovering the magnitude of its competitive edge, saying in an interview with MarketWatch that the comparison was appropriate, not only were top innovators in their respective industries, but because they were using their scale to drive down prices and retain their unprecedented brand.

"Amazon is the first place you go to buy something, whether it's the cheapest or not. And Vanguard is the first place that comes to mind when shopping for low-cost investments, "he said.

Vanguard, and more specifically John Bogle, was a pioneer of so-called passive investing strategies in marketing the first-ever index mutual fund in 1975, which aimed to track the performance of benchmark indices such as the S & P 500.

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rather than actively choosing stocks in order to outperform an index. Because the fund was not actively managed, Vanguard was able to offer funds at extremely low prices, compared to other mutual fund companies, which typically employ teams of analysts and analysts. stock pickers to identify investments.

Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, told MarketWatch that the popularity of these index funds has been steadily increasing since then, and that the trend towards investing in fresh indexes reduced has intensified for a decade.

"Vanguard has been at the crossroads of two trends that have dominated the wealth management industry," he said. "Over the past 10 years, we have seen a significant shift towards index-based investing and, in the active management world, a shift towards active, moderate-cost investing," said Rosenbluth. "Because of its low-cost investment culture and mutual ownership structure, Vanguard is able to reap the rewards of those who want active, low-cost management."

Vanguard is a client-owned company whose shareholders own the funds offered by Vanguard, which in turn owns the company itself.

However, these days, it is not always useful to describe an Amazonian company in its sector, given the growing concerns that sometimes arouse the dominance of Amazon in electronic commerce. Even Bogle, the founder of Vanguard, began to wonder if Vanguard and the Index Fund Revolution have become "too successful for its own good".

In an editorial published in the Wall Street Journal in November, Bogle noted that index mutual fund growth had risen from 4.5% of total US markets in 2002 to 17% in 2018. "If historical trends are maintain, a handful of giant institutional investors one day, hold control of the vote of virtually all major US companies, "he wrote. "Public policies can not ignore this growing dominance and take into account its impact on the financial markets, corporate governance and regulation. These will be major problems in the coming era. "

Some critics have gone so far as to say that passive investing hurts capitalism, because passive investors are not interested in the analysis of securities that accurately determine their price. Rosenbluth says these fears are exacerbated because "most stock transactions are bonds that always occur at the active and individual level".

In addition, a February 18 editorial in the New York Times stated that passive investment funds may be vulnerable to manipulation and conflicts of interest. "Conflicts of interest should be of concern to anyone investing in index funds, many of whom are Americans with retirement accounts. Index providers have tremendous power. The decision to include a company in the S. & P. ​​500 company, for example, results in a reallocation of billions of dollars of investor money. The average company added to the S. & P. ​​500 value gains; When it is withdrawn, its stock price declines as index funds sell their holdings, "wrote article authors Robert J. Jackson Jr. and Steven Davidoff Solomon.

Rosenbluth of CFRA says passive funds are extremely transparent and perhaps even more so than individual stocks.

For Vanguard's success, the director of research said that the growing popularity of the type of passive investment initiated by the company would require the major passive companies to take responsibility for their disproportionate role in corporate governance decisions. "As a number of companies become more focused on ownership, they will need to make sure shareholders know why they've made the decisions they've made."

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