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Vanguard Lowers Fees on Mutual Funds

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Vanguard LogoVanguard has always been known for their low mutual fund fees, one of the reasons why so many experts celebrate their services. However, in order to get the lowest prices possible, you had to invest over $100,000 into a single mutual fund in order to get Admiral Shares. Today, they announced that the minimum required to purchase Admiral Shares would drop from $100,000 to $10,000 for index funds and to $50,000 for active funds.

Here are a few stats:

  • 17 index funds and 35 active funds were affected.
  • Nearly 2 million clients will save on expense ratio decrease by qualifying for Admiral shares.
  • Range of admiral shares expense ratios – 0.07% for Total Stock & S&P 500 to Capital Opportunity (0.41%).

ETFs Lead The Way

When they announced that you could buy Vanguard ETFs for free within a Vanguard brokerage account, I knew it was only a matter of time before the mutual funds would see their prices fall. The Vanguard 500 Index Investor fund (VFINX) has an expense ratio of 0.18% compared to the Vanguard S&P 500 ETF (VOO) with an expense ratio of 0.06%. Since both are “free” with a Vanguard account, there’s no reason why you wouldn’t go with the ETF.

Now take a look at the Admiral Shares version of the Vanguard 500 Index Fund (VFIAX) with it’s 0.07% expense ratio and it’s (former) minimum investment of $100,000… no reason you shouldn’t go with the ETF at this point. With the drop to $10,000, I think it’s enough for some investors to leave things alone since a 0.01% fee difference isn’t going to overcome any tax considerations (why sell shares and pay taxes when you have no need to?).

What do you think? Does this make Vanguard more appealing? Less appealing? Don’t really care?

{ 23 comments, please add your thoughts now! }

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23 Responses to “Vanguard Lowers Fees on Mutual Funds”

  1. nickel says:

    I can’t imagine how it would make Vanguard less appealing.

  2. Edwin Choi says:

    Hi Jim- Quick post! I’ve been a long-time RSS subscriber, but this is my first comment.

    Btw, Vanguard lets you convert funds from one share class to another without commissions. And this is generally not a taxable event as long as you stay within the same fund (Vanguard ETFs are just a share class of their index fund).
    https://personal.vanguard.com/us/content/Funds/FundsVIPERWhatAreVIPERSharesJSP.jsp#link_12

    Also, don’t forget about bid-ask spreads on ETFs. Chasing that last 0.01% may not be worth it for this reason alone.
    http://www.indexuniverse.com/publications/journalofindexes/joi-articles/4221-etfs-spreads-and-liquidity.html

    • Jim says:

      Can you really transfer between ETFs and Mutual Funds w/o affecting your tax basis?

      Excellent point on bid-ask spreads.

      • Chuck says:

        You can convert from fund to ETF, and that is not a taxable event. Conversion from ETF to fund is not offered.

      • Edwin Choi says:

        Chuck’s right. And it look’s like Vanguard will automatically convert your Investor shares to Admiral shares if you qualify.

        “If you’re a Vanguard client, you may be eligible for an automatic promotion to Admiral Shares [..] over the next few weeks, we’ll complete the change for you automatically.”

        And Vanguard clarifies the tax impact as well:

        “Changes from Investor Shares to Admiral Shares of the same fund are tax-free.”

        Source:
        https://personal.vanguard.com/us/insights/article/fund-announcement-10062010

  3. cubiclegeoff says:

    I looked at Vanguard recently just to check them out. Mostly I was curious about their international offerings, but they weren’t anything worthwhile. But the overall small fees could make it worth. Still not sure.

  4. Anonymous says:

    This is huge. I am a longtime Vanguard index mutual fund customer. $10,000 is an achievable level for most normal customers and the low low expenses of Admiral shares allows the common Joes and Janes to make and keep more money versus the Fidelity, T. Rowe Price, Schwab, etc… high fees.

  5. I’m pretty excited about this Jim, but I’m not so sure that the ETFs are still a good choice even if they have a slightly lower expense ratio. I don’t know if I’ve talked with you about it before, but there are three things you have to deal with in ETFs that you don’t in mutual funds: bid/ask spreads, odd lots, and premiums over NAV.

    I did some analysis on this a while back and found that Vanguard’s ETFs are really only a better choice over their mutual funds if you have large amounts to invest in a lump sum. Now that they’ve lowered the minimums for Admiral shares it’s no contest – the funds are better.

    People get distracted by the expense ratios and don’t realize there are other costs to consider (usually because they don’t even know about them).

    • cubiclegeoff says:

      Thanks for pointing this out. There’s always something that impacts your money that you don’t know about.

  6. nickel says:

    Weird. It’s like my comments get eaten by your site or something. Eariler I wrote that I can’t imagine this being anything but positive (or something to that effect). There’s no downside, so what’s not to love? :)

  7. daenyll says:

    This is something to consider for the future, will eventually prolly move over from T. Rowe, though I’m still too low to hit the minimum for the admiral shares at the moment. Start early, stay at it (even if small amounts). Haven’t even secured a full time position for my career, but still looking forward to the nice retire thing after however many years in engineering field I end up with.

  8. live green says:

    This is really good news for the average investor. I have always wanted to invest in Vanguard, but have been swayed away by the fees associated with not having enough money invested. I am heavily considering making the switch over some of these funds.

  9. Eddie says:

    I’m pretty much all-Vanguard for investing anyway….but it’s nice to have a reminder that I’m right, lol.

  10. WRXTuan says:

    This is good news for me. I will be looking forward to be able to get to admiral status soon rather than later.

  11. zapeta says:

    This is great news. I’ve been considering moving to the ETFs, but now I don’t have to.

  12. jsbrendog says:

    so, if i have $10,000+ in my target date fund I can now get admiral target date funds with lower fees?

    • Sadly, no – Vanguard doesn’t have Admiral shares for target date funds. But you could emulate the target date funds with just a little bit of know-how. Learning to rebalance isn’t that difficult. This would give you access to the Admiral shares.

      I’m hoping they do start offering Admiral shares for target date funds though. That would be nice.

      • Jim says:

        I think that’s because Vanguard’s target date funds are an amalgamation of their other funds?

        • Yeah, that’s why – but I don’t know why they can’t use Admiral shares inside of the target date funds.

          • Jim says:

            That’s true. Perhaps there are transactional issues involved… if you sell a share of a Target fund, that percolates into fractions in the underlying funds. Then they start taking on risk, blah blah… I don’t know, just supposing at this point. :)

          • That would be my guess, Jim. Though most people investing in target date funds (especially those with a long time horizon) shouldn’t be selling. But what people should do and what they actually do are two different things. :)

  13. Aaron says:

    For those like me who are invested in the Target Age Retirement funds, roughly in their 30s, who have all investments at Vanguard, this might help you.

    Assumption:

    You believe that the asset allocation in your target age retirement fund is sound.

    In that scenario, you probably shouldn’t consider breaking out of the Target Age Retirement fund to take advantage of this until you have amassed $60,000 at Vanguard. The reason is the lowest % portion of your portfolio is the Emerging Markets fund, which according to the 2040 fund is just under 5% of your portfolio. Since the fund requires at least $3000 to invest in it, you wouldn’t have $3,000 for that fund alone until your portfolio totaled roughly $60,000. You could compose those smaller portions of your portfolios instead through ETFs, but I would think that transaction fees for trading on such lower quantities would probably hurt more than the admiral shares would help.

    So for people who are just getting started with investing, the target age funds are still likely the best choice, but I definitely am leaning more and more towards breaking those out once I amass a larger portfolio.


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