Low management fees have paid off for investors in Australian index-tracking ETFs. 

New data from Vanguard shows index funds have created significant price pressure in the funds management industry and have already helped save Australian investors billions of dollars in investment costs.

The research by Vanguard’s Investment Strategy Group has estimated investors in Australian domiciled funds have collectively saved $14.4 billion since 1998 by investing in low-cost index funds including exchange traded funds (ETFs).1

This reflects ongoing reductions in the asset-weighted expense ratios of Australian index funds, which averaged 22.8 basis points at the start of 2024. This compared with an average asset-weighted expense ratio for Australian active funds of 90.6 basis points.

Vanguard’s research suggests there has been a tethering effect when it comes to fund costs, with both active and index average expense ratios having decreased over time.

Yet, despite costs having come down, the average difference in management costs between active and index funds is still substantial.

Index funds now account for more than $700 billion of assets under management in Australia.

To calculate the amount investors have saved, Vanguard looked at the total assets held in index funds and multiplied this by the difference between active and index fund expense ratios for Australian domiciled funds.

Passive is massive for investors

Index funds now account for more than $700 billion of assets under management in Australia, which includes $168.2 billion invested across 243 index-tracking ETFs at the end of July.

This equated to 81% of the Australian ETF industry’s total assets under management. By contrast, $40.55 billion (19%) was invested across 114 active ETF products.

Vanguard’s research shows index funds have captured around 86% of all ETF investor inflows on the Australian Securities Exchange this year.

That is, out of around $17.55 billion in total ETF inflows over the first seven months of 2024, $14.99 billion had flowed into ASX-listed index funds.

Duncan Burns, Vanguard’s Chief Investment Officer, Asia-Pacific, commented:

“The take-up of index funds by Australian investors over the last 26 years has been phenomenal. By introducing significant competitive price pressure into the Australian industry, index funds have helped to drive down costs for all investors.

“Higher investment costs diminish returns, especially for active managers who aim to outperform markets. The higher the investment costs, the higher the odds of market underperformance.

“A high percentage of investors in active funds underperform index benchmarks because their returns are eroded by high management costs.

“Vanguard’s research on cost savings sends a powerful message. Australian investors are increasingly recognising the performance advantages of being invested in low-cost index funds and the disadvantages of investing into high-cost fund alternatives.”

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1 Data are as of December 31, 2023 for Australian domiciled funds using annual report net expense ratios. In this hypothetical example, data assume index investors would have invested in active funds had index funds not existed. Data reflect the difference between the cumulative expense ratio fees paid by investors owning open-end funds and what they would have paid if index funds didn’t exist. Investor savings are calculated as: (asset-weighted expense ratio of actively managed funds x industry assets) – (industry asset-weighted expense ratio x industry assets). Annual report net expense ratios are defined as the percentage of fund assets used to pay for operating expenses and management fees, including distribution fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs.

Sources: Vanguard calculations, using data from Morningstar, Inc

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