It is difficult to quantify the importance of Jack Bogle, the founder of Vanguard and inventor of the index fund, who died on Wednesday at age 89. As Warren Buffett put it, no one had done more for American investors than Bogle. He made investing ultra-cheap, accessible, and simple enough to get people involved.
One way to put a number on it is to try to figure out how much he has saved Vanguard investors in mutual fund expenses. Vanguard Group, based in Malvern, Pa., is one of the largest investment firms in the world, with more than $5 trillion in assets under management, and 20 million customers.
The number is currently around a half a trillion dollars and likely to hit $1 trillion by 2023 (that’s $1,000,000,000,000).
A quick look at any broad Vanguard index fund or ETF can give you a clue why. For instance, its S&P 500 index fund, VFIAX, the most direct descendant of Bogle’s original index fund, has an expense ratio of just 0.04%. Consider that the average actively managed mutual fund — the pre-Bogle standard — has at least 0.62%. That’s over 15 times more expensive.
In 2016, Bloomberg’s Eric Balchunas calculated what an actual number would be. It’s not a hard thing to do. Look at the difference between the average active fund fee and the average Vanguard fund fee and multiply it by the company’s assets under management. Balchunas calculated it was about $175 billion.
With the trading costs of the active fund, another $140 billion was added. This was central to the Bogle theory: trading is expensive, and you can win by keeping things cheap and simple.
And then, there’s the competition element, called the “Vanguard effect.” With lower fees, other companies try to compete and race to the bottom. Schwab, Fidelity, State Street, and many more all offer products that compete with Vanguard’s low prices. But the credit for this can all go back to Bogle’s revolutionary move in 1976 to start an index fund.
Today, the average industry expense ratio is 0.62%, versus Vanguard’s 0.11%, according to Morningstar and Vanguard. That’s a huge difference and, given Vanguard’s $5 trillion in assets under management, that’s over $25 billion per year. The amount saved is likely to accelerate too, because Vanguard is growing quickly. (In 2016, Vanguard had $3.3 trillion under management. In 2017, around $4 trillion.)
In 2016, Balchunas used a conservative growth rate of 10% to estimate that Vanguard will have saved investors $1 trillion by 2023. In the three years since his estimate, we’ve seen Vanguard grow even faster, hitting $5 trillion in AUM in 2018, not 2020, meaning that trillion in savings to investors will come even sooner than expected.
As Buffett said, "If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle.”