InvestingPersonal finance

Vanguard sets 1,800 ETFs’ trading costs to zero today: Time to move all your money over?

Vanguard sets ETFs trading costs to zero

About a month ago, Vanguard surprised clients and investment advisors (of which I am both) with the announcement that starting in August 2018 (today), Vanguard would offer free trading on almost 1,800 exchange traded funds (ETFs), all but a handful of which are those of Vanguard’s competitors.ย  Although I have earlier argued that even paying a $0.50 – $25.00 trading cost to buy a low-cost ETF is still far better than buying a higher-fee mutual fund, lowering ETFs’ trading costs to literally zero is a limit few Vanguard competitors will match, let alone beat, and one Vanguard can most easily do because they are mutually owned by their clients rather than by external shareholders.ย  Investment advisor influencer Michael Kitces called this the most important financial story of the year, and a game changer for how funds compete for shelf space.ย  I completely agree that the service of holding a passive basket of stocks and bonds is one that naturally leads to a race towards zero fees, and would love to see if Jack Bogle is right about the rest of the industry having to mutualize just to stay competitive.ย  Even though my biggest disagreement with Jack Bogle is that I disagree with owning more of a stock just because it is bigger, and often like to own shares of certain companies directly, Vanguard still charges only $2-7 per trade for clients with less than $1 million in Vanguard ETFs, and zero commission for trading US treasuries.

So far, these changes apply only to Vanguard US accounts, so this change would not benefit non-US clients, for whom Interactive Brokers and Saxo remain my top two international choices, but here I wanted to list a few key considerations for Americans to decide whether to keep their US taxable and IRA accounts at Interactive Brokers vs Vanguard:

Vanguard is a very low cost, very high-quality place to keep a simple, passive, US ETF portfolio

If you are happy with a simple, passive portfolio of low-cost stock and bond ETFs, Vanguard is now the cheapest place to accumulate and hold one without being restricted to a narrow list of fund providers.ย  Now that your Vanguard account is not even subject to the $2-7/trade cost to buy a non-Vanguard country-specific or “smart beta” ETF a few shares at a time, it is much more cost effective (that is, basically zero cost) to accumulate and average into a much wider variety of return sources in your portfolio.ย  When I wrote about Vanguard’s first ever China-only ETF, I noted that Vanguard investors typically hold their China exposure as part of a broad market fund, rather than as any form of country or company specific strategy, but they have far more money in such strategies than the focused funds.

For those seeking more of a “core satellite” approach, it would still be hard to beat paying $40-140/year for 20 individual stock trades on top of all the free ETF purchase trades.

Vanguard is still very US-oriented, Interactive Brokers is more international

Given Vanguard’s advantages, in what case would it make more sense to keep your money at a place like Interactive Brokers instead of at Vanguard?ย  The five main reasons, all having to do with non-US exposure, are:

  1. If you would like to make transfers between your account and a non-US bank or broker (e.g. HSBC Hong Kong)
  2. If you would like to hold or transact in currencies in your account other than US dollars, or
  3. If you would like to invest in non-US assets, for example Hong Kong stocks, SGX-listed futures, or European bonds
  4. If the account holder does not have a US address and SSN
  5. If the account is for a non-US trust, for example an ORSO or SIPP plan

In fact, one non-investment reason I recommend having an Interactive Brokers account is as a low-cost way to transfer money internationally with minimal currency conversion costs.

How I advise clients with Vanguard accounts

Unlike Fidelity, Schwab, TD Ameritrade, Interactive Brokers, or Saxo, Vanguard does not have an “institutional” platform which makes it easy for an advisor like me to manage multiple accounts at once and auto-debit advisor fees.ย  That said, clients for whom I manage Vanguard accountsย typically have larger accounts, and expect simpler solutions at lower cost.ย  For example, for a client with a US$1,000,000 Vanguard account, I would charge only $3,000-6,000 per year in fees (0.30 – 0.60%) for about 10-20 dedicated hours of highly personal service, sometimes including work on a single stock I would do only for that client.ย  Compared with the “about 3%” Advisor’s Alpha Vanguard often writes about, mostly from wholistic financial structuring and behavioral coaching, I find the joy I get in providing these services should be surpassed only by the long-term results they produce. These higher limits are important because as with Schwab in Hong Kong, clients with Vanguard accounts need to settle advisor fees on a separate invoice until Vanguard starts offering an institutional platform again, if it ever does.

I look forward to hearing your comments and questions about Vanguard vs Interactive Brokers.ย  I especially expect to write more about how to build good ETF portfolios within Vanguard if there’s interest.

Leave a Reply