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Vanguard’s Benchmark Switch Reduces Costs

What’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 [3]. 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 [4] 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.