How Does Vanguard Make Money?

How Does Vanguard Make Money?

How does Vanguard makes money with $0 commissions on stocks and ETFs. How Vanguard profits from its customers.

How Does Vanguard Make Money?

Have you ever wondered how Vanguard makes money with zero commissions and free cash balances? If so, read on as we’ve got the answers to your questions.

Vanguard background

First, let’s run down a quick overview of Vanguard.

Vanguard was founded by legendary investor John C. Bogle, who, among other things, pioneered the index fund.

Now, Vanguard is one of the largest investment management firms in the world with more than $7.2 trillion in global assets under management. It’s also the single largest provider of mutual funds and second-largest provider of ETFs (after BlackRock’s iShares).

If you want to own Vanguard mutual funds, there are two options: investor shares or admiral shares. The only difference is that admiral shares have slightly lower expense ratios but require a larger initial investment, usually somewhere between $3,000 and $10,000 per fund.

Like essentially all brokers nowadays, Vanguard doesn’t charge commissions on trades. So how do they make their money? Read on to find out.

How Does Vanguard Make Money?

As a private sector company, Vanguard is not government subsidized. In other words, they must bring in money one way or another in order to continue operating as a sustainable business. Vanguard’s main form of “doing business” is thus charging for certain products and services, such as expense ratios for their funds.

And if you read the overview above, then you’ll know that Vanguard is an absolute giant in the mutual fund and ETF game. This is probably the most common way that people assume Vanguard makes its money.

Vanguard now charges $0 for stock and ETF commissions, however, so they’re no longer taking in this revenue. Some Vanguard mutual funds do have fees for buying and selling shares, but they are not common. There are also mutual fund and ETF expense ratios, so Vanguard does receive money for these; their expense ratios, however, are famously low, 83% less than the industry average according to Vanguard’s website (more details to come below).

Many Vanguard mutual funds do require minimum purchase amounts:

Investor Shares - $1,000 for Vanguard Target Retirement Funds and Vanguard STAR Fund; $3,000 for most actively managed funds

Admiral Shares - $3,000 for most index funds; $50,000 for most actively managed funds; $100,000 for certain sector-specific funds

How Vanguard earns money

These minimums help maximize the amount of money Vanguard has per investment per customer. And with a whopping 60,000 flagship clients ($1 million or more) among its 25 million individual account holders, Vanguard is clearly holding a ton of money—at least $7 trillion in assets under management (AUM), in fact.

Even with relatively miniscule expense ratios, that still works out to a ton of money. Plus, Vanguard’s business model is about putting investors first. This encourages more purchasing of fund/ETF shares, which means Vanguard’s AUM continues to grow and new investors become partial owners of Vanguard’s various funds. This keeps Vanguard operating at least at cost.

Vanguard also charges interest on money borrowed in a margin account, as is standard practice. The interest rate runs as high as 2.50% for balances below $18,999 and as low as -1.25% for balances of at least $1 million—the effective rate, including a 6% base rate, is thus 8.5% and 4.75%, respectively. As such, Vanguard is also making money by offering margin privileges.

Vanguard does have some account service fees. There’s a $20 annual fee for each brokerage and mutual fund-only account, for example. You can eliminate these fees by signing up for e-delivery of account statements and other documents. To read more about Vanguard’s account service fees, you can check their website here.

Vanguard’s “Personal Advisor Services” also allow them to make money, with Vanguard charging a 0.30% advisory fee for these services. For example, if you wanted to invest $50,000 (the minimum for these services), that works out to $37.50 each quarter or $150 over the course of a year. If it were $1 million, then it would be $750 per quarter and $3,000 per year. You can see how this might add up for Vanguard, considering they have 25 million individual account holders in total, many of whom may be using these advising services.

Let’s take a look now at specific mutual fund and ETF expense ratios that Vanguard charges.

Mutual fund expense ratios

Money market funds – These range from 0.11% to 0.16% and include a range of taxable and tax-exempt money market funds.

How does Vanguard make money

U.S. bond funds – These tend to have a range from 0.05% to 0.25%. Admiral Shares for the Total Bond Market Index (VBTLX) only cost 0.05%. The 0.25% expense ratio belongs to VCORX, their core bond fund.

Balanced funds – These have quite a range compared to money market and bond funds. Admiral Shares for the Balanced Index carry a mere 0.07% expense ratio. Some managed global funds are up to 6-7x more expensive, however. In between are Vanguard’s target date funds (for retirement, generally), which hover around 0.12%-0.15%.

U.S. stock funds – These funds are some of Vanguard’s cheapest. For example, Admiral Shares of the S&P500 index (VFIAX) carry an expense ratio of only 0.04%.

International bond and stock funds – These are among Vanguard’s most expensive as some range as high as 0.93%. Vanguard’s primary focus is on U.S. investments and U.S. investors, which may explain these higher rates (in addition to other fees associated with owning some foreign companies).

ETF expense ratios

U.S. bond ETFs – ETFs are generally less expensive than mutual funds. With Vanguard, you will pay a maximum of 0.07% in fees for any given fund. The Total Bond Market ETF (BND) has a measly 0.035% expense ratio.

U.S. stock ETFs – These ETFs are extremely popular, and no doubt in large part due to their low expense ratios, which drop as low as 0.03%. Popular Vanguard ETFs include VTI, VOO, VIG, and VUG (among many others).

How Vanguard makes profit

International stock and bond ETFs – As with their mutual fund cousins, these internationally oriented ETFs cost more than the U.S. focused funds. They range from 0.06% to 0.27%.

Sector & specialty ETFs – These all carry a reasonably low expense ratio at 0.10%.

Vanguard vs Competitors

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Mutual Fund
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TD Ameritrade
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Vanguard Vanguard rating

$0 $20 $1.00 None

How Vanguard Does Not Make Its Money

Vanguard does not make its money through hidden fees or through stock or ETF commissions. Instead, they operate essentially at cost, as the company is owned by its funds, making fund and ETF shareholders partial owners in Vanguard.

In general, everything is low-cost or free with Vanguard. Although they have massive revenues and more than $7 trillion in AUM, they are not publicly traded and truly do appear to operate in the best interests of the investors of their funds.

How Vanguard Makes Money Wrapping up

Vanguard was started by legendary investor Jack Bogle, but even he had to retire in 1999 when he reached the company’s mandatory retirement age of 70 years old.

This is just one example of how Vanguard operates with the best interests of its investors and has an essentially “at-cost” business model. As such, they are easily among the most affordable mutual fund and ETF companies out there with extremely low expense ratios on average and no commissions on ETF and stock trades.

It’s hard not to appreciate this business model if you’re an investor, and it’s one very compelling reason why investors may choose to invest their money in Vanguard funds.