Jack Bogle Led This Investing Fee War

January 31, 2019

Cash & Core

Fee compression is not the only trend driving investor behavior. During 2018, investors shifted market share toward Bogle’s ideal core portfolio building blocks and classic “style box” funds, and away from funds more suited to tactical use. The shift becomes obvious when looking at the top 10 inflows and outflows.


Top 10 ETFs By Inflows


Top 10 ETFs By Outflows


Half of the biggest losers were tactical funds. These narrow-exposure funds hone in on a particular market or apply a targeted strategy. Think real estate, high-yield bonds, sectors or plays like momentum and low volatility. The core funds that faced outflows all have direct competitors that cost a fraction of the price.

The winners, on the other hand, were overwhelmingly broad-based funds that covered a wide geography, such as the U.S., developed markets or emerging markets. These are classic buy-and-hold Bogle building blocks that form the core of portfolios across the U.S. And yes, they are cheap.

Given December’s corrections, it is unsurprising that ETFs that can substitute for money markets funds were a smash hit in 2018. Across the U.S.-domiciled ETF landscape in 2018, cashlike ETFs punched way above their weight, growing 18 times as fast as their starting assets under management would have suggested.


2018 Performance Of US-Domiciled ETFs


Portfolio building blocks, whether slice-and-dice “style box” funds or wide-ranging all-in-one funds, increased their market share. The tactical funds, i.e., thematics, most “smart beta” and the narrow-focused funds, were left behind.


2018 saw a continuation of trends that strongly favor the consumer and threaten all but the most efficient asset management businesses. Flows tell the story of where the market is going. Last year we also saw continued fee compression, diminished opportunity for newcomers, and the dominance of core-type funds that remind us all that simple, cheap portfolios have become the new industry standard. The path to 0.00% may be longer for some product types, but the direction is clear.

In this new zero-cost world, portfolios—not just funds, but full asset allocations—may well be available at marginal cost, or nearly nothing. That’s an amazing legacy, Mr. Bogle.

At the time of writing, the author held no positions in the securities mentioned. Elisabeth Kashner is director of ETF research and analytics for FactSet. Check out Elisabeth Kashner’s new e-book, “Uncover The Key To ETF Tax Efficiency.”

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