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Almost a quarter out of every dollar invested into long-term mutual funds and ETFs in 2013 went to The Vanguard Group, according to Morningstar Inc.
Among all fund companies, Vanguard has finished first or second in terms of in-flows in all but two of the past 20 years
At the risk of sounding like a commercial for the Valley Forge, Pa.-based giant, which controls well over $3 trillion in assets worldwide, the question is "Why invest anywhere else?"
That's not a plug, but a truism.
If Vanguard has become the default standard for fund investors - and it has - then investors should be asking certain questions before picking any other company as steward for their money.
Vanguard has earned its position as the fund industry's big dog with a relentless focus on costs and common sense, and a dedication to reaching long-term success without obsessive interest in topping the market over the short run. The company is not infallible - far from it - but is a deserving role model for the industry, even if it operates with advantages from having trillions of dollars in assets that smaller firms can't hope to replicate.
What investors want to take from Vanguard are those underpinnings of investment success; thus, "Why not Vanguard?" is an appropriate test before buying a fund from any of the competition.
It's also a two-way test, one that any Vanguard investor should apply as well, examining other options instead of blindly throwing money in with their favorite.
Vanguard will not win every contest any more than it gets all of the dollars going into funds. It is an appropriate benchmark, however, because a comparison-buyer who concludes that they're better off going with Number One most likely sidesteps a mistake.
If they buy the competition, they should be thoroughly convinced.
Even Vanguard investors could do the test and decide that they are better off avoiding the family's weak sisters.
Here are the points to measure other funds against Vanguard's offerings:
Costs: This is not necessarily about pinching pennies and measuring absolute costs, but simply taking a look at what you consider "reasonable." Performance is not guaranteed but expenses are, so don't volunteer to pay significantly more if you don't believe you will be rewarded for your dollars.
The average expense ratio for a plain-vanilla stock fund is roughly 0.75 percent. Vanguards costs for an actively managed fund in that space are much less.
If you're examining a fund with costs at least a half a percentage point higher than the Vanguard alternative, that's a significant negative.
Track record: Funds are benchmarked to an index and a peer group. For fund investors, however, the Vanguard fund in the peer group can be a great measuring stick, because you can bet it is achieving whatever results it delivers at a reasonable cost.
If expenses are higher and returns are equal or lower, the fund you are examining is likely to fail the Vanguard test.
Stewardship: Investors tend to be so focused on costs with Vanguard that they ignore the company's stewardship. Vanguard, however, has generally shown that it will replace managers and sub-advisers - outside firms it hires to run certain portfolios - who lag their benchmark significantly, and it closes funds that fail to live up to their potential or that don't deliver on their concept (witness the recent decision to shutter two of the three Vanguard Managed Payout funds).
When sizing up the competition, make sure they don't seem willing to settle for mediocrity. There are a lot of funds out there that would perish if long-term survival was based on merit - and, yes, some of them are run by Vanguard, but if you come away from looking at a fund's paperwork or website feeling that the fund doesn't care for your success, that's a problem. Vanguard long ago recognized that satisfied customers would build its business.
Availability: You might think the "Why not Vanguard?" test only works if the firm is actually in the mix, which means it does not apply in situations like retirement plans where the company is not among the offerings.
Wrong. Vanguard can always be a measuring stick, and its funds can always serve as a benchmark, meaning that if a retirement plan has lesser offerings, you can at least decide which funds are built the most closely to the Vanguard counterpart you would pick if you had unlimited choice in the asset class.
Likewise, you might look at some niche or specialty fund of a type that Vanguard doesn't offer, at which point it is worth wondering whether the concept is all that sound if the industry leader hasn't acted on it yet.
In the end, it's completely possible to build a terrific fund portfolio without owning a Vanguard fund. (Full disclosure: that applies to my investment portfolio.)
What's not possible is to build a good portfolio without having funds that at least have the basic cornerstone characteristics that investors have come to expect from Vanguard.
Year after year, returns and fund flows keep telling that story, and they're not lying.