Index Fund Oligopoly Has Been Good for Consumers
There may be a few dominant passive fund companies, but competition among them has still managed to push down costs, says Jack Bogle.
Note: This video is part four of nine of an interview between Morningstar's Christine Benz and Jack Bogle, founder of Vanguard, at the 2018 Bogleheads conference. Watch the other segments here.
Christine Benz: One interesting thing that we've seen very recently is that it looks like a few firms seem determined to try to out-Vanguard Vanguard on the cost front, at least. Let's talk about what you make about what you make of the entrance of zero-cost index funds, as well as Schwab's increasing apparent interest in getting small investors into index funds at very low costs. What do you think? You called it an oligopoly yesterday.
John C. Bogle: Yeah, and people say it's not an oligopoly. Well, of course it is, but it's a very different kind of oligopoly. The typical oligopoly--corporate oligopoly, manufacturing or whatever it may be--is a few companies controlling the market and being able to raise prices. This oligopoly, the big three--Vanguard, BlackRock and State Street--have driven prices down so low that no competitors want to come in the business. But it's been consumer-favorable, rather than consumer unfavorable.
I don't think they've ever seen anything like that before. It is dominated by these three firms that are probably, let me say 80%, 85% of the total index business. Now all of a sudden into the fray comes Fidelity with its zero-cost funds, and they are into zero. That's in the name of the funds, they're not going to be able to walk back. They, I believe, created their own indexes for these funds, which is kind of a wild card when you're talking about 1 or 2 or 3 or 4 basis points, which is what we're talking about here. They want to break into the business, and I find it kind of amusing, when we started the first index fund that Mr. Johnson, Edward Johnson ...
Benz: Head of Fidelity.
Bogle: ... head of Fidelity ...
Benz: Then-head of Fidelity.
Bogle: ... said he couldn't imagine. He hated the idea. He couldn't imagine that Fidelity clients would be satisfied with not doing better than the market. Well, the fact of the matter is they weren't doing better than that, and they haven't been doing better since. But they are doing what I would do if I were them, and that is you've got to make a big entrance into the market; you've got to make a big blast. So let's have a business that we lose money on, but we don't lose an awful lot because of the cost of running an index fund is small. Let's say they're giving up, let me say just for the heck of it, $50 million in revenues, or $100 million. The firm last year made I believe operating profits of $2.9 billion. They will hardly even know. But he sends a message out to the competitors, and it'll be interesting to see the shareholders' reaction.
I worry about that for Vanguard, but on the other hand I can't imagine any Vanguard shareholder who's had the index fund for any time at all with a big profit, if he sells the Vanguard fund and buys the Fidelity fund, he pays a huge capital gains tax, particularly if he's held it a long time.
Competition is always tough, and I would not want to be a naysayer to say it doesn't matter, because it does matter. I don't think competition can go so far as to pay the investor for going into your index fund, but that's the only step left.
Benz: We're not there yet.
Bogle: We're not there yet.