Some question whether Vanguard's foray into alternative investments is as new as critics claim. They note that Vanguard has offered a market-neutral, long-short equity fund since 1998.

In 2014, Morningstar named the Vanguard Market Neutral fund its alternatives fund of the year. While that vehicle's 1.18% expense ratio dwarfs most index funds, it is substantially less than most hedge funds deploying a comparable strategy.

But like many alternatives funds, the Vanguard market-neutral fund has lagged indexes in recent years, posting declines of -9.57% in 2019 and -11.57% in 2020. So far in 2021, it has climbed about 20%.

Rekenthaler acknowledges that changing times may have prompted Vanguard to explore new tactics. “The strategy that carried Vanguard through its first 40 years, appears to have reached its breaking point,” Rekenthaler said.

“In response, Vanguard executives have broadened the company’s revenue stream, thereby altering its mission. A Vanguard that offers private-equity investments and an advisory service that features exclusive funds isn’t Jack Bogle’s Vanguard. Whether that means that Vanguard has lost its way, or has sensibly adjusted to changing times, I cannot tell,” Rekenthaler said.

Morningstar analyst Alec Lucas agreed, saying, “Vanguard is adapting to the industry conditions it helped create. When your competitors start offering your indices for free, what direction do you go if you’re trying to maximize return? ... Vanguard has wisely tilted toward offering advisor services, adding an active option that has a good shot at attracting dollars.”

Lucas said he is skeptical the company can democratize private equity for public school teachers—as they’ve suggested—but said that remains to be seen. “The real question is what kind of service will Vanguard provide to those not in its advisory business. That’s the pain point,” Lucas said.  

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