Vanguard helped transform investing by making low-cost index investing accessible to millions. But if Vanguard is built around reducing costs for investors, why aren’t its ETFs always the cheapest available?

In this episode, Mark LaMonica and Shani Jayamanne explore the real reasons behind ETF fee differences, compare major Australian international ETFs, and look at how small fee gaps can translate into significant differences in long-term wealth.

Mark and Shani dig into what investors should actually look for when comparing ETFs. Fees are important – and over decades, even seemingly small differences can compound into meaningful amounts. But price isn’t the same thing as value.

They also discuss why some ETFs can charge more because of the costs associated with their underlying indexes, how scale can influence ETF pricing and why a fund’s structure and implementation can matter just as much as its headline fee.

You can find the full article here.

You can find the transcript below:

Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this episode is general in nature. It does not taking into consideration your personal situation, circumstances, or needs.

So big thank you for people that have reviewed our book on Amazon and Goodreads or anywhere else, Audible.

Shani Jayamanne: “Invest Your Way.”

LaMonica: “Invest Your Way,” the name of the book. So, we did want to thank everyone for doing that. If anyone else wants to leave a reviewer rating, we would also appreciate that.

Jayamanne: So, Mark, you’re going to Queensland this weekend. What are you doing?

LaMonica: Tomorrow. I’m going to watch what I assume will be another Wallabies’ loss.

Jayamanne: Okay. And should we notify the Queensland police that you’re going to be there? Because you tend to get in trouble on nights where they’re playing.

LaMonica: Okay. Well, why don’t you just come out and say it?

Jayamanne: Well, someone tried to pick a fight with you at a pub.

LaMonica: I know.

Jayamanne: What happened?

LaMonica: Well, I went to the Wallabies game in Sydney, and then I went to the pub afterwards and the match was at night. And frankly, I’m generally not at the pub by 11 o’clock, mostly because I get there at 2. But yeah, some guy tried to fight me. He had talked to me earlier, and then he came back. I was with my wife and a couple of mates and pushed me.

Jayamanne: He pushed you. Wow. What do you think it was about you that really got to him?

LaMonica: I don’t know. There’s probably a long list. So, yeah, that’s me.

Jayamanne: Safe travels to Queensland.

LaMonica: Exactly. Exactly. So, let’s get into the episode. What are we talking about today? And I know that this episode came from you listening to a podcast.

Jayamanne: Which you always get upset about.

LaMonica: Well, just a little loyalty would be nice. But anyway, tell us what we’re talking about.

Jayamanne: Well, I was listening to a podcast by Acquired, and it was about the history of Vanguard. And it’s a great podcast, but it is four hours long. So just be forewarned. It is called “The communist capitalist who saved investors a trillion dollars.” And it explained the unique history of the company and how it’s structured. And wasn’t news to me. Another great book that runs through this history is The Bogle Effect by Eric Balchunas and has some very familiar Morningstar voices in it if you’re interested. But basically, what it explains is Vanguard’s philosophy and how it has changed the investing landscape.

LaMonica: Now, did you find this podcast just because you searched for communist and this one came up, and you said, Oh, this could be related to work?

Jayamanne: Yes. Yeah, no. It was actually our boss’ boss’ boss sent it in an email. So…

LaMonica: Yes, that is true. But let’s get back to Vanguard. So, I think part of this – and Shani made me listen to the podcast as well – and part of it is just the fact that Vanguard is structured a little differently than most fund managers. So, most fund managers are owned by shareholders. So those shareholders, of course, expect profits and management needs to balance the interests of investors in the products that the fund manager has against the interests of running the business. But Vanguard is different. So, the company operates under a mutual ownership structure. So, what that means is that Vanguard’s funds own Vanguard. And the investors, of course, own the funds as their investors in it. So, there are no outside shareholders that are demanding dividends or higher profits.

Jayamanne: And the theory behind this is simple that if there are no external owners taking a share of the profits, economies of scale can be returned to investors through low lower fees. And for decades, this is exactly what happened. So as Vanguard grew, it repeatedly reduced fees across its product range. And more recently, the company announced one of the largest fee reductions in its history, and they cut fees on dozens of funds at an estimated cost of US$350 million in annual revenue. And this move aligns with Vanguard’s philosophy “as scale grows, investors should benefit.”

LaMonica: And this is one of the reasons that for many investors, Vanguard and low-cost investing are almost inseparable. So, the firm’s founder that Shani mentioned before, John Bogle, he spent decades campaigning against excessive fees, promoting index funds as a simple and effective way to build wealth.

Jayamanne: So, with all of this context, I had a question. As investors, when we’re comparing Vanguard ETFs to their competitors, you’ll find that they’re not always the cheapest. The company that arguably did more than any other for lower investment fees around the world no longer offers the cheapest ETFs available to Australian investors. And I wanted to know why.

So why are they more expensive than for-profit competitors in the market? And the first example that came to my head was the Vanguard MSCI International Shares Index ETF, VGS. I hold this ETF for international exposure in my portfolio. It is Australia’s most popular international ETF and has become the cornerstone holding for many Aussie investors. So, it represents a simple solution to provide global diversification.

LaMonica: And not only is it the most popular global ETF, it is the second most popular ETF in Australia. And Vanguard investors, you would think, should be benefiting from that scale. So, despite this, VGS charges 0.18%, which I will say is not that expensive in the big scheme of things. But competitors such as Betashares Global Shares ETF, with the ticker symbol BGBL, charges 0.08%. And BlackRock’s iShares Core MSCI World ex-Australia ESG ETF charges 0.09%. So, the question I think you had is that if Vanguard exists to lower costs, what explains these fee differences?

Jayamanne: And I’m very lucky because when I have questions like this, I can just get up from my desk and walk to our manager research team and ask them. And the answer has less to do with Vanguard and more to do with the benchmark it tracks. So, every index fund pays a licensing fee to the company that owns the index. And these costs form part of the overall expenses that are borne by investors. So, I spoke to Morningstar Senior Manager Research Analyst, Zunjar, and he said the difference was really – the main driver is index licensing structure. So, ETFs such as VGS, they track MSCI indexes where fees are typically charged as a percentage of assets. So, costs scale with fund size, and unlike other overhead costs, the fund doesn’t benefit from this scale.

LaMonica: And then on the other hand, ETFs from providers like Betashares are from other index providers. So BGBL tracks a Solactive index, which generally has a flatter or fixed licensing fee. So as assets grow, the index cost becomes a smaller proportion of each dollar invested. And that of course allows the ETF provider, in this case Betashares, to lower those fund fees. So, this particular ETF has $4.5 billion Aussie in assets. So BGBL is comfortably profitable according to Zunjar.

Jayamanne: And so, I reached out to Betashares to ask about their pricing, and they let me know that scale has been a really important factor in making BGBL one of the lowest cost global equity ETFs available to Aussie investors. Betashares 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. And according to Betashares, the growth has allowed them to pursue the same goal it achieved with its Aussie shares ETF, A200, which recently surpassed $10 billion in assets.

LaMonica: And these index provider costs can vary greatly from provider to provider and offering to offering. So, research from substantive research based on 40 investment managers that oversee US$5 trillion combined shows that some managers pay up to 13 times more for a similar bundle of services from index providers. And Zunjar adds that Vanguard’s mutual model doesn’t guarantee the lowest fee in every case, particularly where legacy exposures like this MSCI benchmark come with higher underlying costs. So even a company that is committed to reducing costs cannot eliminate these expenses charged by third parties.

Jayamanne: And 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. I also spoke to Vanguard and they confirmed that indexing licensing fees can vary by provider, but added that it’s just one of the many factors when they consider pricing.

LaMonica: So where else do we see operations like Vanguard being more expensive than for-profit competitors? Well, we have it in our own market when we look at the industry super funds. They are owned by members. They follow a not-for-profit model. The profits are returned to the funds to lower fees and costs for members. And Aussie Super is the country’s largest superfund, has $410 billion in assets. 90% of members invest in their Balanced fund, which has over $259 billion at the end of 2025. So that scale is really eye-watering, but then again, so is their fee. The fund charges 0.67% plus $52 per year. So, 0.67% of assets plus $52 per year.

Jayamanne: And I think what’s clear is that not-for-profit doesn’t mean that you operate on the razor’s edge and you don’t indulge 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, and you can find the link to that in my article.

LaMonica: So ultimately, not-for-profit doesn’t always translate to efficiency. So don’t just automatically assume that it is in your best interest and that they are acting in your best interest. So, fees shouldn’t be the only determinant of your decision, but it’s a really important consideration. So, every dollar paid in fees is a dollar that’s not compounding for your future. The other thing is that they are also guaranteed, a fee you’re going to pay it no matter what. So, you’ll always be paying this fee. You won’t always be getting a return. So, we’ve done some research and you’ve run a model on this. So, what do these fee differences, what is the impact that they actually have?

Jayamanne: All right. So, we’ll take the lowest-cost competitor there with BGBL. So, on a $100,000 investment with $100 a month in extra contributions, after 20 years, there’s a significant difference between a fee of 0.18% and 0.08%. And that’s assuming a 7% per annum return. You’ll be paying $8,546 to Betashares in comparison to $19,055 to Vanguard. And that’s not even considering other measures of value. Betashares points to another potential advantage of BGBL’s structure. Since inception, it has outperformed its underlying index by around 0.2% per year, which it attributes partly to its low fee and the way global equity ETFs can benefit from withholding tax efficiencies.

LaMonica: Okay. So, let’s run this on retirement outcomes as well. And we can go back to our industry super example. So, let’s consider an alternative to Aussie Super. So once again, if you take $100,000, you put $1,200 in contributions a month over 30 years, same 7% return, and compare a 0.67% fee to 0.20%. So, you’re paying $98,000 on the lower fee as opposed to $309,000 in fees. And that is a really meaningful difference in anybody’s retirement outcome.

Jayamanne: So, 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 an 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 & Mid-Cap Index.

LaMonica: And both indexes cover large and mid-cap companies across developed markets and aim to capture roughly 85% of each market’s free float market capitalization. Both indexes are market cap weighted, both exclude Australia and provide broad exposure to developed markets. The main differences are in the methodology rather than the structure. MSCI and Solactive use different rules for classifying markets, determining index constituents and handling corporate actions. And these are really minor differences. So, there’s a modest variation in holdings.

Jayamanne: So, with no discernible differences in indices, why not always choose the cheaper option? And for me, it’s not as simple as that. I’ve held VGS for many years. It is a sizable proportion of my portfolio outside of super. And selling would mean that I would incur capital gains. And I chose VGS because I believe Vanguard has a long history of acting in investors’ interests and the fee differential between competitors wasn’t as large. The history of acting in investors’ interests is important to me because I’ve seen where it can cost investors with examples like IWLD. And I’ve linked that analysis in my article if you’re curious.

LaMonica: Okay. So, that’s one thing. I certainly understand your reasons. You’ve been holding this for a while. I like to avoid capital gains. But if you had to make the decision today, if you were starting out today, you have $0 invested, you want a global ETF, would you make the same decision or would you consider these other options?

Jayamanne: Yeah. Well, I had to make the decision recently. So last year I chose an ETF for international exposure in my super, a longer time horizon, a different tax environment for capital gains. The value equation changed for me where the opportunity cost was higher over decades, and there were more options in the market for me to choose from when I first chose VGS. I didn’t make the same choice the second time around. It seemed to go against logic when I ran the models. And I’ve seen the research, like from Morningstar, where it shows that fees are the most reliable indicator of success.

LaMonica: And for investors looking to understand what’s important to them, fees are important, but they’re of course not the whole picture. The history of goodwill may not be important to the next investor as it was to you, Shani. What is most important is that when you’re looking for a solution for your portfolio, match the index of a passive investment or a mandate for an active manager to the goals in your portfolio, something we talk about all the time on here. When there is not much difference between these different indices, look to what adds value for you.

Jayamanne: But I think at the end of the day, the rise of lower-cost competitors is ultimately good news. We know that fees contribute significantly to your end outcomes. And 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.

LaMonica: And the difference in fees obviously do matter, but so does the quality of the organization managing your money, so does the implementation expertise that they have. And I think at least important to both of us is really a culture that favors individual and prioritizes individual investors.

Jayamanne: Exactly it. So, investors should consider their perceived value over price. This may mean that the cheapest ETF still might be the best option for you, but consider the whole offering to make a well-informed decision that serves you over the long term.

LaMonica: Okay. Well, luckily for listeners, that was not a four-hour podcast.

Jayamanne: Depends how slowly you listen to it. We get a few comments saying that sometimes people listen to it on like 0.5 speed, which sound very drunk.

LaMonica: Because you speak very quickly, though.

Jayamanne: I know.

LaMonica: So, you probably sound normal.

Jayamanne: People keep telling me that I’m a very quick speaker.

LaMonica: Okay, but it wasn’t four hours. We do hope you got something out of this episode. And once again, if you have read our book, we would really appreciate a comment or a rating in wherever you bought it, whatever platform you bought it for. So, thank you very much for listening.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

If anyone would like to support this project you can buy the book now. Thanks in advance!

Purchase from Amazon

Purchase from Booktopia