When it comes to cost savings on fixed income ETFs, Vanguard is head-and-shoulders above competitors. But it can be easy to get up caught in the low expense ratio game. This is a reminder to investors that cost savings are incurred over time and not on the short-term horizon.
Earlier this year, “Vanguard announced a number of fee cuts”: across various funds. The timing couldn’t be more auspicious for fixed income ETFs. The major stock market indexes have been doused with a large pail of volatility. And that reminds investors that bonds are pertinent as part of a portfolio.
As part of the fee cuts, expense ratios were lowered for the Vanguard Interim-Term Corporate Bond ETF (VCIT ) and the Vanguard Tax-Exempt Bond ETF (VTEB ). VCIT, an ideal option for getting intermediate corporate bond exposure, saw its expense ratio drop 1 basis point. VTEB, which offers ingress to the muni bond market, experienced a cut of 2 basis points.
With both funds now exhibiting low expense ratios of 0.03%, it’s easy to get caught up in a strategy that involves choosing a fund with the lowest expense ratio. That’s especially pertinent now in a time when inflation is high and consumers, or investors are looking to cut costs wherever possible.
However, “Vanguard reminds us”: that to maximize the benefits of these low expense ratios, they’re best realized over time.
Think Long Term to Maximize Beneflt
One way, according to Vanguard, is to look at funds through the lens of total cost of ownership (TCO). The long-term benefits are readily apparent when comparing a fund like the Vanguard Long-Term Treasury ETF (VGLT ) to a comparable competitor (in this case, the iShares 20+ Year Treasury Bond ETF (TLT ).
In this comparison, Vanguard reminds us that low expense ratios over a long-term horizon become more important than spreads. This becomes readily apparent after a 15-day period (when a breakeven point is reached) when the low-cost option starts to become significant in the case of VGLT. When taken in totality with respect to fund performance, the low costs become even more relative.
“At Vanguard, we believe our funds’ impressive long-term performance owes much to their low costs,” Vanguard noted. “For the 10 years ended December 31, 2024, 84% of our funds outpaced the average results of competing funds.”
To really see this dynamic come into play, read Vanguard’s analysis on the benefits of low ETF expense ratios. It also calls to mind words from Vanguard founder John C. Bogle.
“In investing, realize that you get what you don’t pay for,” Bogle notably said. “Whatever future returns the markets are generous enough to deliver, few investors will succeed in capturing 100% of those returns, simply because of the high costs of investing—all those commissions, management fees, investment expenses, yes, even taxes—so pare them to the bone.”
For more news, information, and analysis, visit the Fixed Income Channel.
