FYI: Copy & Paste 8/2/14: Lewis Braham: Barron's
Regards,
Ted
Edited by Snowball to move the post back toward some approximation of the "fair use" envisaged by copyright law.
Please do not cut-and-paste wholesale from copyrighted materials. Excerpt, explain and link (if you can). Summarize, comment and aim folks toward the original when you can't.
"The case for index funds and ETFs has always rested soundly on costs. After expenses, most money managers can't beat their benchmarks, so a fund charging 1.5% will lag behind an ETF charging 0.05%. But what happens when the actively managed fund costs the same -- or less -- than the ETF? Welcome to the Vanguard paradox."
[two paragraphs deleted]
Moreover, Vanguard's actively managed funds are so well run that on average they beat their zero-fee benchmarks even over long periods of time. [remainder on the paragraph, which supplied the empirical data, deleted]
SO WHY BOTHER with ETFs?"
Mr. Braham cites two reasons, cost aside: (1) consisistency - you eliminate style drift, manager risk and so on and (2) mistimed purchases of sectors, styles and niches - which might be mitigated by holding a broad market index.
In general, though, Vanguard often has active products that are as good as or better than passive ones. Two flies remain in the anointment: (1) Vanguard as "dumbed down" (Dan Wiener's phrase) some funds by adding too many managers and (2) trading costs imposed when you buy Vanguard funds through non-Vanguard platforms can overwhelm your performance edge.
Comments
Nothing is sure but if you research a fund and wonder why they hold only index funds or have 150 managers that should be a clue to look elsewhere.
Just my thoughts. Thanks Ted.
I know that my employers care about how many clicks and eyeballs are on the actual pages of my stories, that it could mean the difference between me being hired again or not. This is how I put a roof over my head and food in my mouth. So why not do the honorable thing and stop copying the stories and provide a link instead if you like them? As I said, I like your site and find the discussions here interesting. I also believe in freedom of expression, but this is the fourth or fifth time I've seen one of my stories copied. Is chivalry dead?
Lewis, welcome to the forum. I've enjoyed your articles.
It's disrespectful, ignorant, and just plain inexcusable after these people have been told to stop it time after time. Thank you very much for posting - I think someone finally may have broken through the barrier of hard-headed ignorance.
On behalf of MFO members, we should realize there are better approach to share contents and thus are sorry.
The House that Bogle Built
@LewisBraham It has been my understanding that some number of the Vanguard actively managed funds have ER's that depend on performance, does that affect these calculations? do these not apply to these sector funds? or if it does do the ER's always remain below comparable ETF's? Also, any thoughts on their recent law suit?
I also hope you frequent this board often. I plan on checking out your book too.
@Sven, I share your thoughts entirely.
Vanguard does have performance-based fees for its active funds, but these adjustments are usually relatively small in either direction so that Vanguard still has the edge over many ETFs. Also, it is in most cases a win-win situations because the fees only go up if a fund is beating its benchmark, which is usually the benchmarks the ETFs are tracking--so either the fund has a performance advantage if fees are higher or a fee advantage if performance is lower. The only way investors would lose out in such a situation would be to buy the active fund aftera hot streak when fees are higher and then sell too soon as performance cools, thus paying the higher fee and missing the performance edge. With these funds it makes sense to buy and hold or if you're more of a risk taker to buy after the funds lag and get the lowest fees, hoping the fund will bounce back.
I don't have an opinion really on the law suit yet as I haven't read the brief. But in my experience law suits against fund companies even when they have merit rarely go anywhere. The industry has very good, powerful lawyers. It also seems doubtful that that the argyment that charging consumers less for management services is a form of tax evasion will hold up in court in a lengthy appeal process. Where Vanguard does seem more vulnerable is in the $1.5 billion cash reserve, which could appear as a slush fund to the right judge. Although I haven't read the brief, I think it's high time Vanguard's bonus system for its executives be examined more closely as evidence that the firm really isn's a "non-profit" as it often claims. But that is another story....
To some extent, isn't Vanguard a non-profit to the same extent that Hollywood movies don't make a profit?
Hollywood accounting is kind of strange - many of the most popular movies never make a profit, so that if you get your points/participation on the "back end" - after everyone else has been paid - you will be waiting forever before you get profits.
See the following wiki link for a discussion of Hollywood accounting:
http://en.wikipedia.org/wiki/Hollywood_accounting
Here is a brief extract from the Wikipedia link: (see link for full text)
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Hollywood accounting can take several forms... The specific schemes can range from the simple and obvious to the extremely complex.
Three main factors in Hollywood accounting reduce the reported profit of a movie, and all have to do with the calculation of overhead:
Production overhead: ...
Distribution overhead: ...
Marketing overhead: ...
All of the above means of calculating overhead are highly controversial, even within the accounting profession....
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Vanguard may be a non-profit in the same way that Hollywood movies don't make a profit.
Also - for true non profits - other than "Vanguard" - the non-profits are subject to some fairly rigorous reporting with respect to their operations, expenses, and staff salaries.
Again - Vanguard does not provide anything close to this sort of disclosure. It's not a non-profit. It's more like a co-operative, where the members of the co-op don't have a lot of visibility as to what is really going on with respect to the co-op's financial arrangements.
IMHO ...