Vanguard's change in new lower initial investment amount (automatic conversion date)

Comments

• Gary

  February 2019

  Just what are we doing? I read this as listed funds becoming treated as Admiral fee structure funds with a minimum of $ 3000.00 in each fund. Is this right?
• TheShadow

  February 2019

  The funds listed above are affected by the change and the $3K initial investment.
  
  Below is the earlier link concerning the change:
  
  https://www.mutualfundobserver.com/discuss/discussion/45476/vanguard-change-coming
  
• Gary

  February 2019

  A lot of thoughts and prayers in earlier link that I still don't understand. I guess we will have to stay tuned to see what happens boys and girls.
• TheShadow

  February 2019 edited February 2019

  Yes, those admiral classes of index funds (some newly created) will be accessible for $3K to normal investors are listed above. I converted my investor class 500 index fund (VFINX) into the admiral class of the 500 index fund (VFIAX) by accessing my account on line. When I accessed my Vanguard accounts, I was notified that my 500 index fund was eligible for the conversion.
  
  I believe the Vanguard Dividend Appreciation Index Fund Admiral class was one example of the newly created Admiral class of funds.
  
• msf

  February 2019

  If you are a retail investor in one of the funds above, your shares will be automatically converted into Admiral shares. It's a tax-free exchange.
  
  At the same time, Admiral shares will have their minimums dropped to $3K, same as Investor class shares.
  
  At the end of the day, you will have Admiral class shares (with Admiral class ERs) and a $3K min. Investor class shares will still exist, but they'll be pointless for you to buy (since they have higher ERs), and you won't be allowed to anyway.
  
  Why aren't Investor class shares simply disappearing then? Because funds like Vanguard Target Retirement 2025 (VTTVX) will still own them. The Vanguard funds of funds own investor class shares so that they can claim they're not adding any expenses on top of the underlying funds.
  
  It would be more honest (or at least more transparent) if the funds owned Admiral (or even better, Institutional) class shares of the underlying funds and simply added on a small management fee, say 0.08% like FFNOX does.
• Derf

  February 2019

  msf: You said; "
  Why aren't Investor class shares simply disappearing then? Because funds like Vanguard Target Retirement 2025 (VTTVX) will still own them. The Vanguard funds of funds own investor class shares so that they can claim they're not adding any expenses on top of the underlying funds"
  If Admiral shares have a lower ER , then the cost would be less ? Only thing I see it's likely the 3 K $$'s hasn't been put into 2025 fund. What Is it that I'm missing/
  Derf
  
• msf

  February 2019

  VTTVX holds four funds. Along with their weights and ERs, they are:
  
  Total stock mkt index VTSMX (Inv shares): 37.49%, 0.14% ER
  Total bond mkt II index VTBIX (Inv shares): 26.38%, 0.09% ER
  Total int'l stock index VGTSX (Inv shares): 24.95%, 0.17% ER
  Total int'l bond index VTIBX (Inv shares): 11.12%, 0.13% ER
  
  None of this is changing. While you, as a retail investor, will have your Investor class shares converted to cheaper Admiral shares, and while new retail investors will be able to buy Admiral shares of these underlying funds for a $3K min, VTTVX will continue to hold the more expensive Investor class shares of these four funds.
  
  So the cost of owning VTTVX remains: 37.49% x 0.14% + 26.38% x 0.09% + 24.95% x 0.17% + 11.12% x 0.13% = 0.1331%
  
  Were VTTVX's holdings to be moved to Admiral class shares with ERs of 0.04% (VTSAX), 0.09% (VTBIX - no Admiral shares for Bond II), 0.11% (VTIAX), and 0.11% (VTABX), this fund's expenses would be reduced to 0.0784%.
  
  Were VTTVX's holdings to be moved to the cheapest share class of each underlying fund, the ERs it would be paying would be: 0.015% (VSTSX, Institutional Select shares), 0.02% (VTBNX, I shares), 0.043% (VTISX, Institutional Select shares), and 0.025% (VSIBX, Institutional Select Shares), the fund's expenses would be a mere 0.0244%.
  
  By keeping the Investor shares around, and by using those Investor shares in VTTVX, Vanguard is able to collect an extra 0.11% in fees while claiming to have a 0% management fee on VTTVX. This is deceptive. It's using overpriced shares to get paid for managing this fund of funds. I have no issue with Vanguard collecting a nominal fee for running this fund. It's the way it hides the number that is disturbing.
• Gary

  February 2019

  What other funds of Vanguard use Investor class funds do we know?
• msf

  March 2019

  All of them, or at least all retail Vanguard funds of funds. Same as T. Rowe Price's funds of funds using their retail (not institutional) class shares in underlying funds, same as other fund families. It's how they can claim they're providing their funds of funds with no second layer of fees.
  
  This is true of Vanguard's funds of active funds as well as their funds of index funds. For example, STAR (VGSTX) invests in Windor II's Investor class shares (VWNFX) rather than the cheaper Admiral class shares (VWNAX).
• claimui

  March 2019 edited March 2019

  msf said:

  By keeping the Investor shares around, and by using those Investor shares in VTTVX, Vanguard is able to collect an extra 0.11% in fees while claiming to have a 0% management fee on VTTVX. This is deceptive.

  But Vanguard doesn't claim this at all. On their fund page for VTTVX, they clearly report an expense ratio of 0.13%, which includes the fees of the underlying funds. Nowhere do they claim that they have a 0% fee. Anyone can plainly see that the "Target Retirement" funds like VTTVX are more expensive than the plain index funds -- no deception here.
• msf

  March 2019 edited March 2019

  All funds incorporate the expenses of their underlying funds as part of their total expense ratio. One of the knocks against funds of funds is that they slather a second layer of fees on top of those expenses.
  
  For example, from M*'s classroom:

  So what's the catch? Expenses, mostly. The fund of funds structure creates a double layer of costs. First, there are the expenses associated with running the fund of funds itself—management fees, administrative costs, etc. Second, there are the costs associated with the underlying funds—the same sorts of management fees, administrative costs, and so on.

  By purchasing Investor class shares while qualifying for Institutional class shares, VTTVX is skimming investors' money and using it to make it seem that there's no second layer of costs. Vanguard certainly does claim a 0% management fee for VTTVX.
  
  From the prospectus:

  
  

  Fees and Expenses
  The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. ...
  
  Annual Fund Operating Expenses
  (Expenses that you pay each year as a percentage of the value of your investment)
  
  

  ---

  Management Fees                    None
  

  ---

  12b-1 Distribution Fee               None
  

  ---

  Other Expenses                         None
  

  ---

  Acquired Fund Fees and Expenses 0.13%
  

  ---

  Total Annual Fund Operating Expenses 0.13%

  ---

  Compare that with the way Fidelity reports the fees in its funds of index funds. No deception there.
  
  The acquired fees cost is 10 basis points lower. Fidelity uses fairly priced index funds while Vanguard uses overpriced Investor class shares that exists for no other reason than to be used in these funds of funds.
  
  On the other hand, Fidelity calls out a true second layer of costs rather than reporting all those costs as "None".
  
  From FQIFX summary prospectus:

  
  

  Fee Table
  The following table describes the fees and expenses that may be incurred when you buy and hold shares of the Fund. ...
  
  Annual Fund Operating Expenses
  (expenses that you pay each year as a % of the value of your investment)
  
  Management fees                                  None
  Distribution and/or Service (12b-1) fees None
  Other expenses                                     0.15%
  Acquired fund fees and expenses         0.03%
  Total annual operating expenses     0.18%