Vanguard Group Inc.’s biggest salvo yet in its campaign to cut fees for the investing masses presents industry rivals with a painful choice. Follow suit and lose potentially hundreds of millions in revenue — or hold the line and risk losing badly needed market share.
The Valley Forge, Pennsylvania-based company unleashed its largest-ever fee reduction this week, slashing its average asset-weighted expense ratio to just 0.07% across its $10 trillion under management — a sliver of the industry average of 0.44%. The move sent shock waves across asset management, dragging down BlackRock Inc. to its worst day since 2022 on Monday while also sending the likes of Invesco Ltd. and State Street Corp. tumbling.
Fueling the angst is the fact that Vanguard isn’t under the same pressure to maintain margins as its competitors are. Vanguard’s fund investors elect its board members, meaning they effectively own the company. As such, extra cash or assets are typically funneled toward lowering fees.
Vanguard estimates that Monday’s move will generate $350 million this year in investor savings — another phrase for lost revenue. But for the fund company and its constituents, it’s an acceptable trade-off. Rivals, though, operate under a different set of economics, with traditional ownership structures and shareholders to please. They’re more obliged to squeeze out as much profit as they can, while at the same time staying competitive. This sets up a conundrum.
“As one of the world’s largest asset managers, Vanguard’s move will pass on significant savings to investors, while also putting significant margin pressure on ETF competitors,” Aniket Ullal, CFRA’s head of ETF research, wrote in a note. “It will be interesting to see how the other leading ETF issuers respond to Vanguard’s aggressive fee reduction strategy. It appears likely that only BlackRock has the scale to sustain such low fees in the core, indexed segments of the market.”
Wall Street has attempted to quantify possible retaliation. BlackRock’s responses could range from cutting fees on its so-called core ETFs to a wholesale repricing of its lineup, according to KBW analyst Aidan Hall, who has an outperform rating on the stock. While the latter is “highly unlikely,” pursuing those options could shave 0.5% to 5.6% off BlackRock’s 2026 operating income, he wrote.
Invesco declined to comment, while a representative for State Street said the firm remains “committed to reducing costs where possible while ensuring we continue to provide valuable, well-crafted SPDR ETFs to investors.” A representative for BlackRock didn’t immediately respond to requests for comment.
A seemingly never-ending fee war — fueled in a large part by Vanguard — has steadily strained issuers, to the point where a large portion of ETFs actually lose money. Roughly one-third to nearly half of the more than 3,900 US-listed ETFs are likely unable to cover their annual operating costs, according to a Citigroup Inc. analysis, which assumed that funds have between $200,000 to $350,000 in fixed costs, with up to roughly 7.5 basis points in variable costs.
While rock-bottom fees produce brutal economics for ETF firms, investor demand tends to be highly concentrated toward the cheapest products. Funds charging less than 0.1% accounting for 60% of all assets, according to Bloomberg Intelligence.
“Fees are one of the most important differentiating factors when selecting among similar ETFs, so other issuers are either forced to follow with their own fee cuts or face potential loss of market share,” said Roxanna Islam, head of sector and industry research at TMX VettaFi.
‘Vanguard Effect’
Vanguard chief executive officer Salim Ramji is no stranger to the race to the bottom. Ramji, who joined Vanguard in July from rival BlackRock, said that the firm’s historical fee reductions — which total 2,000 since its founding in 1975 — have benefitted investors of all stripes.
“That’s the Vanguard effect across the industry,” he said in an interview. “Because it’s not just our clients that benefit from it — price competition benefits all investors, whether they’re our clients or we hope they will be clients one day in the future.”
To escape this dynamic, issuers have increasingly been spinning out higher-priced strategies on everything from stock options to cryptocurrencies to concentrated portfolios, leading to a slight uptick in the average fee of newly launched ETFs in 2024. Indeed, rather than compete with Vanguard on low-cost, index-based funds, firms such as JPMorgan will likely focus on “higher margin areas” such as active investing and alternatives, CFRA’s Ullal said.
Pure-play asset managers such as BlackRock and Invesco could be stung the most by Vanguard’s move given that ETFs account for a third of the companies’ revenues, BI data shows. Jefferies analyst Daniel Fannon notes that BlackRock has a long-term strategy of reinvesting 1.5% to 2.5% of its ETF revenue into pricing. Given that ETF revenue totaled $6.5 billion in 2024, that could translate into $100 million to $150 million of price cuts.
But even BlackRock — which still stands as the the world’s biggest ETF issuer, though Vanguard is quickly gaining ground — has been diversifying its revenue streams. Recent big-ticket acquisitions of private asset managers including GIP and HPS, as well as data provider Preqin, help the Larry Fink-founded firm “mitigate against these competitive dynamics,” Fannon wrote.
A history of consistent cost cutting has created a sense of goodwill and loyalty among Vanguard’s client base, says Bloomberg Intelligence’s Senior ETF Analyst Eric Balchunas, who wrote a book about Bogle and his firm titled “The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions.”
“Clients love this — it’s like, you’re sitting there and you’re getting a little relief, a little cheaper product, and over time those basis points end up compounding into real dollars, lots of dollars, and they are yours now instead of the industry’s,” he said. “And that’s why they have the stickiest investors on the planet.”
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