Future Focus: My ETF is no longer the cheapest. Does it matter?
Exploring a paradox at the heart of modern investing.
There’s a paradox at the heart of modern investing.
The company that arguably did more than any other to lower investment fees around the world no longer offers the cheapest ETFs available to Australian investors.
For many investors, Vanguard and low-cost investing are almost inseparable. The firm’s founder, John Bogle, spent decades campaigning against excessive fees and promoting index funds as a simple and effective way to build wealth. He was a man of strong opinions. Initially, he was also notoriously against ETFs. He believed that they led to emotional trading with intra-day access. He wasn’t entirely wrong.
Today, investors comparing Vanguard ETFs to competitors will find that they aren’t always the cheapest. The reason for this reveals an important lesson about what drives ETF fees, how Vanguard’s unique ownership structure works, and why the cheapest fund is not always the most compelling option.
The company that changed investing
To understand why it is surprising there are cheaper ETFs than Vanguard in several categories you need to understand why Vanguard exists in the first place. I recently listened to a podcast episode from Acquired about the history of Vanguard, ‘The Communist Capitalist Who Saved Investors a Trillion Dollars’. It explained the unique history of the company and how it led to how the company is structured.
Most investment managers are owned by shareholders. Those shareholders expect profits, and management must balance the interests of investors in the fund manager’s products against the interests of the owners of the business. Vanguard is different. The company operates under a mutual ownership structure. Vanguard’s funds own Vanguard, and the investors own the funds. There are no outside shareholders demanding dividends or higher profits.
The theory is simple - if there are no external owners taking a share of the profits, economies of scale can be returned to investors through lower fees.
For decades, that is exactly what happened. As Vanguard grew, it repeatedly reduced fees across its product range. More recently, the company announced one of the largest fee reductions in its history, cutting fees on dozens of funds at an estimated cost of USD 350 million in annual revenue. This move aligns with the philosophy of the firm – as scale grows, investors should benefit.
The Bogle Effect by Eric Balchanus is another great resource for understanding the history of this investment giant.
When listening to the Vanguard story and gaining a better of understanding of their structure I kept coming back to the same question. Why are some Vanguard ETFs more expensive than for-profit competitors in the market?
The first example that came into my head was The Vanguard MSCI International Shares Index ETF VGS. I hold this ETF for international share exposure in my portfolio. It is Australia’s most popular international ETF and has become a cornerstone holding for many Australian investors. It represents a simple solution to provide global diversification.
This is the second largest ETF in Australia and Vanguard investors should be benefiting from the scale. Despite this, VGS charges 0.18%. Competitors such as Betashares Global Shares ETF BGBL charge 0.08% p.a. and Blackrock’s iShares Core MSCI World ex Aus ESG ETF is 0.09% p.a.
If Vanguard exists to lower costs, what explains the difference?
The cost investors rarely see
The answer has less to do with Vanguard and more to do with the benchmark it tracks. Every index fund pays a licensing fee to the company that owns the index. These costs form part of the overall expenses borne by investors.
I spoke to Morningstar Senior Manager Research analyst Zunjar Sanzgiri about why this makes a difference. He explains that the main driver is the index licensing structure. ETFs such as VGS track MSCI Indexes, where fees are typically charged as a percentage of assets. Costs scale with fund size and unlike other overhead costs, the fund does not benefit from scale.
On the other hand, ETFs from providers such as Betashares are from other index providers. BGBL tracks a Solactive Index which generally has a flatter or fixed licensing fee. As assets grow, the index cost becomes a much smaller proportion of each dollar invested. This allows for lower fund fees. At over $4.5 billion AUD in assets, BGBL is comfortably profitable, according to Sanzgiri.
Betashares says scale has been an important factor in making BGBL one of the lowest-cost global equity ETFs available to Australian investors. The firm says it has been focused on using its growing size and platform to make broad market exposures more cost-effective. BGBL is a prime example of growth as the ETF is a little more than three years old. According to Betashares the growth has allowed the fund manager to pursue the same goal it achieved with its Australian shares ETF, A200, which recently surpassed $10 billion in assets.
Research from Substantive Research based on 40 investment managers that oversee $5 trillion USD combined shows that some managers pay up to 13 times more for similar bundle of services from index providers.
Sanzgiri adds that Vanguard’s mutual model doesn’t guarantee the lowest fee in every case, particularly where legacy exposures like MSCI benchmarks come with higher underlying costs. Even a company committed to reducing costs cannot eliminate expenses charged by third parties.
The result is that a fund can be operated by an investor-owned company and still charge more than a similar fund run by a traditional for-profit business.
A Vanguard spokesperson confirmed that index licensing fees can vary by provider but added that they are just one of many factors considered in pricing.
The Vanguards of the Australian market
It may be a bit of a sore point to compare industry superfunds to communist capitalism as Vanguard has been – but there are many similarities to how they operate. They are owned by members and follow a not-for profit model. The profits are returned to the funds to lower fees and costs to members.
AustralianSuper is the country’s largest superfund, with over $410 billion in assets under management. 90% of members invest in their Balanced Fund, with over $259 billion at the end of 2025. The scale is eye-watering – and so is the fee. The fund charges 0.67% p.a plus $52 a year.
It’s important to remember that not-for-profit does not mean operating on the razor’s edge, never indulging in anything except the absolutely necessary overheads.
These funds still have large marketing divisions to attract new members. They still have well-paid investment professionals running the funds containing our nest eggs. They are major sponsors of Australian sports teams to engage with younger demographics. The Australian Financial Review has laid out some of the numbers here. There’s nothing Gulag-like with these Communist Capitalists.
Not-for-profit doesn’t always translate to efficiency, but investors should also be careful not to disregard this when making investment decisions. It is an important reason as to why, even with the relatively higher fee, Morningstar still rates ETFs like VGS highly. Fees aren’t the whole picture, but they are an important consideration.
What does the fee difference actually mean?
Fees matter. Every dollar paid in fees is a dollar that cannot compound for your future. They are also guaranteed. You will always be paying a fee, and you won’t always be getting a return.
On a $100,000 investment, with $100 a month in extra contributions, after 20 years there is a significant difference between a fee of 0.18% and 0.08% (assuming a 7% p.a. return).
Fees are not the only measure of value. Betashares points to another potential advantage of BGBL’s structure: since inception, it has outperformed its underlying index by around 0.20% per year, which it attributes partly to its low fee and the way global equity ETFs can benefit from withholding tax efficiencies.
Change the timeline and the difference in fees. Let’s consider an alternative to AustralianSuper. Take $100,000 with $1,200 in contributions a month over 30 years, a 7% p.a. return and compare 0.67% p.a. fee to 0.20%.
Those amounts are meaningful and should not be dismissed. Over decades, a difference in fees can compound into a substantial cost that detracts from your total return outcome. This should be one of your main considerations when choosing your fund as our research shows that fees are a reliable predictor of the success of an investment.
The context for value
Let’s go back to where this story began. I wanted to understand why my international exposure ETF was not the cheapest of the pack. Overhead costs were called out as the issue from our manager research analysts.
Comparing VGS against the cheaper of the other global ETFs, the underlying indexes are remarkably similar. VGS follows the MSCI World ex-Australia Index, while BGBL tracks the Solactive GBS Developed Markets ex Australia Large and Mid-Cap Index.
Both indexes cover large and mid-cap companies across developed markets and aim to capture roughly 85% of each market’s free-float market capitalisation. Both indexes are market-cap weighted, exclude Australia and provide broad exposure to developed markets.
The main differences are methodological rather than structural. MSCI and Solactive use different rules for classifying markets, determining index constituents and handling corporate actions. These differences lead to modest variations in holdings.
With no discernible difference in indices, why not always choose the cheaper option? For me, it is not as simple as that. I have held VGS for many years. It is a sizable proportion of my portfolio outside of superannuation, and selling would mean that I would incur capital gains.
I chose VGS because I believe Vanguard has a long history of acting in investors’ interests. This is important to me because I have seen where it can cost investors. I’ve written about instances where investors have not been prioritised before in my column and gave an example of IWLD as an ultra-low-cost ETF that cost investors over the long run. This does not mean it is the right choice for everyone.
For investors determining what is important to them in an ETF, fees are an important determinant but should not be a sole determinant. Similarly, the history of goodwill may not be important to the next investor, as it was for me when I first chose VGS. Matching the index of a passive investment or a mandate for an active manager to the goals of your portfolio is key. When there is not much difference between the indexes, look to what adds value for you.
Value over price
The rise of lower-cost competitors is ultimately good news. We know that fees contribute significantly to your end outcomes.
One of Vanguard’s greatest legacies is that it forced the entire industry to compete more aggressively on fees. Investors today have access to global share exposure at costs that would have been unimaginable a generation ago.
A difference in fees matter. So does the quality of the organisation managing your money. So does implementation expertise. So does a culture that prioritises investors.
Investors should consider their perceived value over price. This may mean that the cheapest ETF may still be the best option for you, but consider the whole offering to make a well informed decision that serves you over the long term.
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