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Vanguard’s Benchmark Switch Reduces Costs

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Vanguard LogoWhat’s in a fund’s benchmark? Apparently a lot.

It’s been several years in the making but Vanguard is changing the benchmarks it uses for its index funds. I didn’t think much about the news but it turns out it was a cost saving movie. When mutual fund companies, like Vanguard, use a benchmark for its funds, it has to pay that benchmark a fee. The licensing fee is not insignificant and can amount to close to 0.01% tacked onto the expense ratio of a fund.

If 0.01% seems like chump change, it is and it isn’t. For a low cost mutual fund, 0.01% is a big chunk when the fund itself is only charging around 0.15%. 0.01% is nothing for an actively managed fund that has an expense ratio north of 1%!

One fund that I invest in, the Vanguard Total Stock Market Index has an expense ratio of 0.18% (the Admiral Shares sport a 0.06% expense ratio), will be changing its benchmark and hopefully that means a svelter expense ratio.

As I’ve always believed, it’s difficult to make a meaningful impact on the performance of your portfolio (index is best!) so it’s best to control what you can – how much you pay to invest. I’m glad to see that Vanguard is continuing their commitment to lower costs, I wonder if changing benchmarks will have any impact on performance.

{ 3 comments, please add your thoughts now! }

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3 Responses to “Vanguard’s Benchmark Switch Reduces Costs”

  1. Switching indices might be a cost savings move, but it makes all past performance a much less reliable indicator of future performance.

    Now you have to look at the 2 indices current and past and see how well they track to each other, this can be a subtle way to try to enhance performance to perspective investors, if the new index under performs the old index all future returns will look like they beat their index by a higher margin, conversely the margin can narrow and people might think the fund is now under performing and choose to invest elsewhere which might not be in their interest.

    • Ray says:

      I think this is a very valid point, but at the same time they’re only looking to reduce their expense ratio and not looking to change the outlook on how they invest, the change shouldn’t be very significant.

  2. I could not agree more regarding indexing. And Vanguard’s action here was a smart move and one that keeps them on the forefront of the ETF landscape. The great thing is that with all the competition in the ETF space right now, it’s individual investors who are reaping the benefits. On a slight side note, although many issuers are reducing expense ratios on some of their core funds (like Schwab), be careful of the ETF’s spread. What may seem like a good deal based on expense ratio may actually be more expensive given a large bid/ask spread.


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