Vanguard Redeems Its Redemption Fees - Adviser Investments

Vanguard Redeems Its Redemption Fees

May 25, 2012

Vanguard Redeems It’s Redemption Fees

In somewhat of a surprise announcement, Vanguard eliminated back-end loads on 33 funds, effective immediately. Only two Vanguard funds will continue to charge sales fees going forward, FTSE All-World ex-U.S. Small-Cap Index and Global ex-U.S. Real Estate Index.

The purpose of the loads (charged on sales of shares within two months to 12 months of purchase, depending on the fund) was, ostensibly, to control frequent trading into and out of funds. Vanguard says this type of trading activity is no longer an issue (and one might question if it ever really was one at several of the funds, like Capital Opportunity, PRIMECAP or PRIMECAP Core, which have been closed to new investors for some time). That said, the firm will likely monitor frequent traders and block investors if they feel their trading activity is excessive.

Of course, many of the index funds that formerly charged loads also have an ETF share class, which has never been subject to any redemption fees, giving cost-conscious traders a strong incentive to avoid the Investor or Admiral shares. For the actively managed funds that were subject to the loads, the outside managers, who take their compensation based on assets under management, may have raised the point with Vanguard that the loads were discouraging some investors from buying their funds. On the flip side, however, the removal of the loads may also give those investors who were holding onto their shares long enough to wait out the periods subject to the fees the incentive to sell.

Either way, this is obviously a beneficial change for investors in the funds affected (see table below), and it’s a great public relations opportunity for Vanguard as well. For a firm that stakes its reputation on being a low-cost fund provider, onerous sales charges seemed out of character. Eliminating almost all back-end loads from its fund lineup is another feather in Vanguard’s low-cost cap.

 

Funds Dropping Back-End Loads

 

Source: Vanguard

 

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