New data from Vanguard shows index funds have brought price pressure to the industry and helped investors in Europe save billions in costs
Vanguard’s Investment Strategy Group (ISG) have estimated that investors in European domiciled funds have saved £77.4 (€90.6) billion in additional investment costs since 2011, by investing in index funds including ETFs.[1]
To calculate the amount investors have saved, Vanguard looked at the assets in indexing and multiplied this by the difference between active and index fund expense ratios for European domiciled funds.
Vanguard’s analysis suggests there has been a tethering effect when it comes to fund costs in Europe. Both active and index expense ratios have been decreasing over the last 12 years.
Despite costs coming down, the difference between active and index funds is still stark: the average asset-weighted expense ratio as of the end of 2023 was 1.05% for active funds compared to 0.21% for index funds.
Stephen Lawrence, head of Indexing Research, Vanguard, said:
“Index funds have vastly improved outcomes for investors. One of their main benefits is low fees, which has a strong historical correlation with better-than-average fund performance.
“They have also introduced significant competitive price pressure to the industry, benefitting all investors. While there are plenty of skilled active managers out there, the benefits of their skill can be swallowed up by costs. Vanguard believes low-cost funds, active and index, will continue to play an important part in investors’ portfolios, however high-cost funds will not.”
[1] Data are as of December 31, 2023 for European domiciled funds using annual report net expense ratios. In this hypothetical example, data assume index investors would have invested in active funds had index funds not existed. Data reflect the difference between the cumulative expense ratio fees paid by investors owning open-end funds and what they would have paid if index funds didn’t exist. Investor savings are calculated as: (asset-weighted expense ratio of actively managed funds x industry assets) – (industry asset-weighted expense ratio x industry assets). Annual report net expense ratios are defined as the percentage of fund assets used to pay for operating expenses and management fees, including distribution fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs.
Sources: Vanguard calculations, using data from Morningstar, Inc.
