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Lewis Braham: Should Vanguard's ETFs Be Even Cheaper?

TedTed
in Fund Discussions
FYI: (Click On Article Title At Top Of Google Search)
To an outside observer, it may seem ironic that the exchange-traded-fund manager most beloved by profit-seeking investors is built like a nonprofit organization. The Vanguard Group manages $3.5 trillion in assets, yet because it is shareholder-owned, there’s no pressure from Wall Street or private stakeholders to drive profits—it operates at cost. That, plus its tremendous scale and efficiency, allows it to offer its products and services for less than its for-profit competitors.
Regards,
Ted
https://www.google.com/#q=Should+Vanguard’s+ETFs+Be+Even+Cheaper?+Barron's

Comments

  • beebee
    edited October 2016
    Low ER on high volume is still a very profitable business model for Vanguard and other large volume/low fee houses. Reminds me that high volumes of money (QE) loaned at record low interest rates is still a very profitable business model for banks and other financial institutions.
  • kevindowkevindow
    One also needs to consider securities lending fees generated by the large ETFs which may make them essentially free to own:

    http://www.forbes.com/sites/simonmoore/2014/08/29/securities-lending-makes-some-etfs-free/#23f36f4c2b44

    Kevin
  • beebee
    edited October 2016
    Thanks @Kevindow for that article. Most investors are clueless to this aspect of the financial world. Security lending has had a few issues to deal with, specifically unsettled trades or FTD (Failure to Deliver).

    Here's a website that "scratches the surface" of the challenges that face the security lending and security trading industry.

    deepcapture.com/category/introduction-an-overview-of-deep-capture/

    The Presentation:
    deepcapture

  • kevindowkevindow
    edited October 2016
    @bee, Nothing to disagree with Dr. Byrne's points. Wall Street has always had political allies who were purchased with contributions. And too many of the folks on Bloomberg and CNBC are good looking teleprompter readers and at most journalists, and definitely not economists or financial experts.

    And from the WSJ: "The ETF With the 0.00% Fee”

    Use the top article on this SEARCH.

    Kevin


  • LewisBraham
    edited October 2016
    Securities lending is indeed a part of the structure of most ETFs. While Vanguard returns all of the proceeds above its internal costs for this lending to ETF shareholders, so does Schwab, although in Schwab's case it uses an outside unaffiliated vendor to do the lending, which takes a cut of the lending proceeds. Schwab keeps none of these proceeds for itself. BlackRock is a different story, keeping a portion of the lending proceeds for itself, although the amount is small enough that 22% of Schwab's equity ETFs beat their benchmarks instead of merely tracking them. The financial risks of this lending is another story entirely and as your Forbes' article points out, Kevin, different fund companies have different policies on what they will lend.

    Regarding the analysis in Deep Capture, I should add that its original author, Patrick Byrne is the CEO of Overstock.com, and a controversial figure himself:
    garyweiss.blogspot.com/2016/05/overstockcom-ceo-patrick-byrne-loses.html
  • LewisBraham
    garyweiss.blogspot.com/2016/05/overstockcom-ceo-patrick-byrne-loses.html
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