How Does Vanguard Make Money? - Time Value Millionaire (2024)

Over the last 50 years, Vanguard has built a reputation of providing everyday investors with access to some of the lowest-cost funds available on the market.

But with such low fees, how does Vanguard make money?

The short answer is Vanguard’s revenue is comprised of account-based fees, investment fees as well as trading commissions. However, because of Vanguard’s unique ownership structure, the company operates “at cost” and invests any profits back into the business in order to maintain it’s industry-leading low costs for it’s investors.

With that being said, the rest of this article will provide the more technical answer to this question by examining the following:

• What is Vanguard’s Business Model?
• How Vanguard Makes Money: 2 Different Sources
  • Vanguard Management Fees: Mutual Funds & ETFs
  • Vanguard Management Fees: Investment Accounts
• Final Thoughts

Let’s dive in!

What is Vanguard’s Business Model?

Relative to other companies in the investment management space (Fidelity, Charles Schwab, etc.), Vanguard goes against the grain with it’s unique business model.

Here is how Vanguard explains it:

Unlike other investment management companies, we don’t have shareholders or a private ownership group. Vanguard is the only investment management company owned by its investors*—you and more than 30 million Vanguard investors worldwide. That keeps us consistently focused on investor needs first.

Vanguard

In other words, Vanguard is owned by those who invest in their funds. This is in contrast to a company like Fidelity, where individuals who invest in their funds do not become Fidelity shareholders.

Fun Fact: 49% of Fidelity is owned by one single family 🙂

With that being said, while Vanguard investors don’t have voting rights and are not entitled to cash dividends, Vanguard is designed to pursue their peoples’ best interests over profits.

The end result is the business being running “at-cost” to it’s investors with any profits being reinvested back into the business in order to maintain the company’s industry-leading low fees.

And this business model has resonated with people. As of 2022, Vanguard is the largest provider of mutual funds globally.

How Vanguard Makes Money: 2 Different Sources

Now that we have a better understanding of Vanguard’s business model, let’s take a deeper look into how Vanguard generates revenue.

Vanguard Management Fees: Mutual Funds & ETFs

Most mutual funds & ETFs have something called an expense ratio.

In a nutshell, an expense ratio is essentially an annual fee charged to investors that cover the expenses associated with running a specific fund. Examples of these expenses include but are not limited to:

• Fund Management
• Administrative Costs
• Marketing Costs

However, because of Vanguard’s business model, they have some of the lowest fees in the industry. A large reason for this is because a lot of their investment funds are designed to passively track/match a particular index vs trying to actively outperform the market.

If you are curious on a particular’s fund expense ratio, you can navigate over to Vanguard and search for the particular fund that you are interested in learning more about. As an example, the Vanguard Total Stock Market Index Fund (VTSAX) has an expense ratio of 0.04%.

However, when comparing different funds, it’s important to take a holistic approach. For a more concrete example, check out this analysis comparing VFWAX vs VTIAX.

Vanguard Management Fees: Investment Accounts

Vanguard offers access to a wide variety of financial accounts.

For simplicity’s sake, below is a table summarizing the different investment account types along with their associated fees (and how to waive the fees):

For specific fees related to buying/selling funds within each account, Vanguard does a great job detailing their brokerage commissions here.

Related Reading: How to Set Up a Vanguard 3 Fund Portfolio

Final Thoughts

Like many others in the Financial Independence community, I’m a Vanguard Fan Boy.

That is because I personally resonate with the “investor-first” business model. A lot of companies like to talk big game, but the reality is that Vanguard puts their money where their mouth is.

Furthermore, Jack Bogle (founder of Vanguard) also invented the whole concept of index funds and not trying to outperform the market. So they have bonus points with me there as well 🙂

Thank you for reading! 🙂

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Full Disclosure: Nothing on this site should ever be considered advice, research or an invitation to buy or sell securities, please see my ‘Terms & Conditions’ page for a full disclaimer.