How do companies like Blackrock and Vanguard make money?

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How do companies like Blackrock and Vanguard make money?

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They manage money and take a fee for doing so basically. Vanguard has a somewhat unique setup where the funds are generally owned by the investors themselves to minimize cost but in return, they pay a royalty to the Vanguard Group to use the name.

By providing investment services. People give them their money, they invest it for them while charging a fee. When people have given you trillions of dollars, the small percentage that you make from fees is still a lot of money.

The manage investments (ie. mutual funds, direct portfolio management, etc.) and charge management fees for doing so. When you have many billions or even trillions of dollars under management, even the fractions of a percent they charge in fees add up quickly.

Vanguard is best known for their index funds, where they invest money to mirror an index like the S&P500. So they take investors’ money deposited with them and buy shares of the companies that comprise the S&P.

Fees

All brokerages charge fees to some extent. When trading individual stocks it may be a commission fee. For companies like Blackrock and Vanguard that manage funds, the funds have an expense ratio which is the fee for being in the fund. Some funds have load fees which charge you a certain percentage to buy into or sell out of the fund.

Vanguard runs a huge number of mutual funds and ETFs, they’re noted for their low fees but a small margin on a huge volume is still a lot of money. Their biggest fund is VFIAX which charges just 0.04% as a fee, but since its managing $416B that small percentage still turns into $166M/year on a fund where management is effectively setting a computer to track a specific index and printing tax forms once a year so its mostly profit.

I own shares in a Vanguard ETF. This fund has hundreds of companies in it and charges me a .01% fee to manage it. For me the .01% fee is well worth the hassel of having to purchase these hundreds of shares myself (nor do I have the capital to buy entire shares of all of them).

People invest billions of dollars into this fund and suddenly that .01% is a nice return for Vanguard.