Vanguard Index Fund Expense Ratio Changes 2012 / 2013

While I’m catching up on my index fund updates, below is a list of all the expense ratio updates from Vanguard mutual funds and ETFs for both 2012 and 2013 year-to-date. Vanguard continues to consistently drop what they charge to investors as their own costs drop. But first, a quick expense ratio definition taken from their website is below.

Each percentage point in an expense ratio represents an annual charge of $100 against every $10,000 you invest in that fund. A hypothetical fund with a 0.50% expense ratio charges its shareholders $50 for every $10,000 invested, so a reduction from 0.50% to 0.25% would represent a savings of $25 for every $10,000 you’ve invested.

These expenses are taken out in fractional amounts every day and reduce the fund’s net asset value (NAV). The numbers may seem small if you’re a beginning investor, but they will compound quietly and relentlessly over time. Don’t underestimate the importance of maintaining low-costs in your long-term return.

Announcements & Notable Changes

  • February 2012 announcement. Vanguard Emerging Markets Stock Index, FTSE All-World ex-US Index, Total International Stock Index, and Total World Stock Index funds amongst others had share classes with expense ratio drops.
  • March 2012 announcement. The Wellington fund had an expense ratio drop. Founded in 1929, Wellington is Vanguard’s oldest mutual fund and the nation’s oldest balanced fund.
  • April 2012 announcement. Vanguard Inflation-Protected Securities Fund, Total Bond Market Index Fund, 500 Index Fund, Balanced Index Fund, Extended Market Index Fund, Small-Cap Value Index Fund, Total Stock Market Index Fund, and Value Index Fund had share classes with expense ratio drops.
  • May 2012 announcement. Vanguard REIT Index Fund, and Vanguard’s Short / Intermediate / Long-Term Investment-Grade Funds, Vanguard’s Short / Intermediate / Long-Term Treasury Funds, and a few other bond funds had expense ratio drops.
  • December 2012 announcement. The expense ratios on their money market funds went down, although yields are still microscopic. Short / Intermediate / Long-Term Corporate Bond Index ETF and several other sector ETFs had expense ratio drops.
  • January 2013 announcement. A lot of actively-managed funds were updated; most went down in cost, a few went up. Notably, the Target Retirement 2010-2055 Funds saw their expense ratio drop by a basis point to 0.16%-0.18%.
  • February 2013 announcement. The expense ratio on the High Dividend Yield Index ETF went down to 0.10%. When you buy an dividend ETF, you need that lower expense ratio as otherwise you’re just giving a huge chunk of your dividends away. I just hate the idea of being charged 0.20% or higher when I could just hold the companies individually.

Comments

  1. I’m a big Vanguard fan and have my Roth there, and I’ve always been impressed by how Vanguard seems to be pressuring other mutual fund companies to lower their expense ratios too. My workplace retirement accounts (and thus most of my retirement money) is at Fidelity, and their Spartan index funds have had significant recent drops in ER as well, and I assume this was done to stay competitive with Vanguard. So, thank you Vanguard!

  2. Totally new to this, and just want to clarify:
    For every $10k you have in your managed retirement account as of “January 1″ each year, you get charged a percentage (like 0.16%)? Or do they charge it monthly? Do you reduce your taxed income from the investments by the amount of fees you paid? Are the fees themselves taxed?

    How possible is it that your investments will be reduced in any given year due to a dumpy market or fees (assuming you as the investor take nothing and add nothing)?

  3. @Dan – Very true. Good reminder, I also need to write about that as well as their lowered minimum investment requirements.

    @Penny – The expenses are taken out in tiny little proportional increments every single day. Otherwise, you could just time your trades to avoid the fees. If you had a theoretical mutual fund that stayed at $10,000 NAV the entire year with a 0.50% expense ratio, then all those little daily fees would add up to $50. The fees simply reduce the net asset value, so it would be accounted for in your selling price.

    Let’s say you start a year at $10,000, and the expense ratio is 1%, but the underlying investments earn 1% over that year. At the end of the year (with all my simplifications), you still just have $10,000 in net asset value. The 1% growth went to the mutual fund management company.

    If that same $10,000 with the same underlying investments were managed at a 0.10% expense ratio, then you’d end the year at $10,090, with a gain of $90. More for you, less for managers. Hope that helps.

  4. I talked with my CFP last month about expenses getting lower and he told me it was a trend with all the index funds. Maybe Vanguard is leading the charge but its good news for us index fund holders.

  5. I also just noticed that the February 2013 announcement was updated on 2/28 to include a lot of their other big index funds.

  6. Thanks for the update Jonathan. Wow, between this and the recent changes with Fidelity’s Spartan funds, my average weighted ER is now 0.11%!

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