Vanguard has announced that the Vanguard Emerging Markets Stock Index mutual fund (VEIEX) will no longer have a purchase and redemption fee of 0.25%, effectively immediately. Although not huge, this fee was rather annoying and a major reason for many investors (including me) to buy the ETF version VWO instead. It’s good to see that Vanguard is continuing to pass on lower expenses when possible. There is still a 2% short-term redemption fee to discourage frequent trading.
We’re eliminating the 0.25% fee on all purchases and redemptions of Vanguard Emerging Markets Stock Index Fund. The fees had been in place to offset the higher trading costs associated with foreign and illiquid markets. As the fund has matured, and with cash flow in and out of the fund offsetting much of these costs, we no longer need to assess these fees.
The fund is adopting the short-term trading fee that applies to most of our other international funds. To deter costly short-term trading activity, Vanguard assesses a 2% fee on shares redeemed within two months of purchase. Because the fee is paid directly to the fund, it’s not a load.
The Investor shares of the fund ($3,000 minimum) have an expense ratio of 0.33%, but the ETF and Admiral shares ($10,000 minimum) both have expense ratios of 0.20%. If you have enough fund to qualify for Admiral shares, my slight personal preference is the mutual fund as I have no desire to trade intra-day and I like the ease of dollar-based transactions. If I want to by $500 of the fund, I can buy exactly $500 of the fund without worrying about partial shares, limit orders, or bid/ask spreads.
Now, what to do with my existing shares of VWO? You can’t convert ETF shares into mutual fund shares, unfortunately. My initial action will probably be to stop future purchases of VWO while keeping the old shares, and use new incoming cashflow to buy VEIEX. Once I reach $10,000, I will convert automatically (and seamlessly) to the Admiral shares (VEMAX) and stick with that. In the future, if I have to sell some Emerging Markets when rebalancing asset allocations, perhaps I’ll sell the VWO. Or I’ll sell the VWO if there is another market drop and can reduce any capital gains hit.
You can buy and sell all Vanguard mutual funds and ETFs without a commission with an account directly at Vanguard. 32 Vanguard ETFs, including the Emerging Markets ETF VWO, are available commission-free at TD Ameritrade.
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I just got the letter and I’m happy they got rid of the purchase fee and redemption fee. However, I already bought that fund back in January…I should have waited! Although I invested $3000 and .25% worked out to $7.50…which really wasn’t all that bad.
Why would you want to own Mutual Fund instead of ETF? I thought it was advantageous to hold ETF over Mutual Fund (in terms of tax efficiency).
@ahbskauh: No difference in tax treatment between MF and ETFs. Only difference is in fees.
MF: Upfront load charge when you buy and then you pay taxes on capital gains at the end. Any expense ratio is paid during the holding period as well.
ETF: Upfront commission paid, expense ratio paid while holding onto the stock, and then taxes on cap gains and another commission paid at sale time.
@Andrew – Yes, for the most part the fee isn’t crushing, just one of those things that are annoying when you know there is a better option. Imagine being charged a quarter for going into a Target instead of a Wal-mart.
@ahbskauh – In the case of Vanguard, their ETFs and mutual funds are simply different share classes of the same basket of investments. There is no difference in tax efficiency for Vanguard specifically, as the capital gains and dividends are the same.
Because of the structural difference of ETFs and mutual funds, it is true that the ETFs have some advantage tax-wise, but it really depends. The average ETF is most likely more tax-efficient than the average mutual fund, but much of that advantage is simply because most ETFs are passively managed.