Brennan (cont'd): If it’s just a straight index mutual fund, arguably it’s probably better than the ETF because it’s administratively less complex. For example, there is no bid/ask spread. There are a whole bunch of things that make a fund easier to administer. And you know you're going to buy it every two weeks, or once a month, or whatever. So tradability doesn’t really have much value to you. But again, you're on the right issue, and I would just define it a little more broadly about well-priced index funds, as opposed to ETFs.
IU: When do you see this fee war coming to an end?
Brennan: At the end of the day, for Vanguard, it is a different question. We give scaled benefits back to the customer. We just give them back in lower fees. So the question is, “Do people want to use temporary or permanent loss leaders in certain instances?” They may. To me, it feels like we’re down near where that floor is. I think it’s safe to say prices aren’t going up. The investor is benefiting. And, at least from where I sit, you can see a sense for this “Vanguard Effect.” It sounds egotistical, but it’s not intended to. It’s someone else’s expression.
When a force like Vanguard comes along, builds scale and competes in a price-driven business, you have to match us or come close. And I think that’s probably the way this dynamic plays out for a while, because there is more, as you know well, than merely a temporary fee reduction or something else that goes into cost. You need large size and great liquidity to make the total cost of ownership the best that it can be.
The Vanguard Effect is not going to go the other way. There are certainly other issues such as index-provider fees and administrative fees. How the whole package adds up is a really interesting question. But the past four or five years have been dynamically wonderful for the consumer. And that’s a good thing, in the end.
IU: Do investors have better portfolios than they had 10 years ago?
Brennan: There's no question. Up until 1977, Vanguard’s history was as a load-fund company, which is sort of lost in history. But in the last several years, we’ve become, again, we hope, a very valued provider to the advisor community. It’s been a ball for us. We love it, because most of the world is going to have an advisor. And if we can provide our products and help them do their jobs better, all the better.
So we get a chance to see what portfolios looked like many years ago, and what they look like today, and they're just strategically better structured. There's always going to be tinkering at the edges. But you look at the diversification, you look at the embedded costs, and they're better portfolios.