But how would you compete against the established companies? It cannot be higher returns, because all index-funds are supposed to have roughly the same returns (if they mirror the same index).

So it must be lower fees. And you are able to charge lower fees if the total amount of money you manage is big. (Because a tiny percentage of a huge sum will still cover your costs.) The established players already manage a few trillion dollars, so it is hard to compete against them in this area.

Absolutely correct. Also, in the case of Vanguard, they're known as an "At-Cost" company. This means that they take no profit from the investors, and instead will return any excess money in the form of higher returns. This makes it very difficult to operate a profitable business in this space.

How does their business model work then? Subscription fees?

Vanguard is structured as a mutual company; it is owned by funds managed by the company, and is therefore owned by its customers. [1] So its owners have no incentive to increase fees in order to increase profits.

Actually, Vanguard has been sued over this [2][3] -- the claim essentially being that Vanguard ought to owe taxes on those profits that it didn't earn from fees that it didn't charge.

[1] https://en.wikipedia.org/wiki/The_Vanguard_Group [2] https://www.nytimes.com/2016/02/07/your-money/vanguard-a-cha... [3] https://news.ycombinator.com/item?id=11081550

They're essentially not-for-profit. So no business model other than serving clients and covering costs.

Any insight on why every other mutual fund company can't just offer index funds 'at cost' in addition to their normal portfolio?

Seems like that would still be beneficial from a business perspective somehow, although one would probably need to be well versed in banking/finance/securities laws to figure out how to make it so..

They already do: "The loss leaders of the investment world" [1]

Their theory? You'll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice.

[1] http://www.reuters.com/article/us-column-stern-advice-idUSKC...

Because it is very efficient and low profit. The margins in that market are tiny and one of the dominant players (Vanguard) gives even those back.

Only if you don't want to make a profit. The incumbents have the advantage of a functioning system and high visibility and can tolerate low margins.

Doesn't sound that different than running a "public good non-profit" as a retirement gig for some savvy folks. Bring better cheaper investing to the masses. You in turn can leverage the scale to do the type of investing you want to do cheaper or just sit like the rest of us. Not every venture has to be world-bendingly profitable to provide value.