Winner of the Great Fee War: You

I used to be pretty strict in my pursuit of low-fees. How about .5%? - no, lower. .3%? no, lower. .06%? - ok, that'll do. After almost two decades with my ears pinned back, I recently took a look around to find out I can relax - the War over Fund Fees now appears over. DIY investors won.

One of my bedrock principles for investing has been to prioritize low fees. It’s not a surprise given my early influences with investing: Malkiel’s Random Walk Down Wall Street was the first investing book to have any sort of impact on me, and I took from that book a general orientation for efficient markets, index investing, and trying to keep costs low.

I followed that up with getting into Jack Bogle’s books and ideas early on, so I spent very little time in the high-fee traps that most investors (unfortunately) find themselves in as they get started. Although I did have an Edward Jones account filled with a few high-priced mutual funds back in the early 2000s, I wasn’t putting much at all in there, so after just a year or two I took that money out and opened an account at Vanguard. Since then, fees have been a key concern and one of the things I look to first when thinking about a new investment.

Lately, I’ve noticed that I now have quite a few ETFs with fees that I would have stayed away from even just a couple of years ago. The fees on some of them caught me by surprise. First and foremost is my recent foray into managed futures and DMBF, with an expense ratio of .95%. Based on my recent post about small-cap value funds, I’ll now be sending future funds in this asset class to Avantis’s small-cap value fund (AVUV) with an expense ratio of .25%. I’ll be stopping new contributions to Vanguard’s VIOV, which charges just .06%. Passing up a fund at that low level and choosing one four times as expensive would have just been unfathomable for an earlier version of me.

Why the change?

It’s partly me knowing a bit more than I did back then (overconfidence alert!), but more than anything, it’s because the current “highs” for fees aren’t really that high anymore, all things considered. This is indeed a Golden Age for individual investors - there are simply so many different types of ETFs available, at such low prices.

I remember funds in the late 2000s, even up to the 2010s, with typical expense ratios around 2, 2.5, 3%, and sometimes these funds would also carry front-loads, back-loads, side-loads, whatever, taking another 50 or 75 basis points, their extra fee that I was supposed to pay based on my assumption that they had some special ability to pick stocks. Even this was an improvement from the 1960s, when the average load was 7%.

I remember when I started to see “No Load Funds” as an advertising point - it actually was big news that you wouldn’t have to pay a fee to buy or sell. They also usually had these cool, thought-provoking titles - always seemingly including words like “Opportunity,” “Quality,” “New Direction,” or whatever type of marketing-schlock somebody could think of to get me to part with my money. Up, down, or sideways, it didn’t really matter what they called them - they got their fees and I got the false notion that I was better off with the mutual fund managers looking out for me.

Since then, the steady downward pressure on fees has been amazing to watch, and even if you don’t consider yourself a Boglehead investor, I think you’ll have to give credit for Vanguard’s work in being at, well, the vanguard, of that move to lower fees for investors.

Current Thinking on Fees

Maybe we can now retire the question of fees from its pole position in debates. They are still something to pay attention to, but when the difference is two tenths of a percentage point, we’re probably at the stage where other issues about the funds in question are way more significant. A recent Twitter thread on the subject of fees made this point for me - there was general agreement that fees are important but not the “be all, end all” and the whole question is about much lower stakes now.

My checklist is now pretty simple:

  1. Does the fund I’mn thinking about do something that I either can’t do myself, or don’t want to do myself? DBMF is a great example - I simply don’t have the skills, experience, or available time to manage the complicated process of long and short futures contacts across dozens of asset classes.
  2. Is the fund relying on a systematic, rules-based decision-making process or is it discretionary? If the former, I’m ok with higher fees as compensation for being more vigilant. If the latter, then probably not, as that gets into active management. There is scant evidence that active managers who rely on discretionary stock-picking can consistently outperform the market, relative to their fees. A good example of a higher cost fund I prefer over a low-cost alternative is Avantis’s Small-Cap Value fund, AVUV.

I guess the best news for investors is that fees are one thing you don’t need to worry about quite as much as you used to. If they are still important to you, then staying in the Vanguard universe is fine. For a little bit more oomph, then the funds from Avantis and Dimensional Fund Advisors (DFA) are great, and if you’re rich enough, AQR might be the best of all.

If you do leave Vanguard for those other fund families, make sure to give Vanguard a respectful wave goodbye - we DIYers owe them a lot!