Vanguard has just announced some changes to their fee schedule, which includes some great news for us smaller investors who like Vanguard but kept getting dinged by their low-balance fees.
Before, you had to dodge the following $10 fees:
- The maintenance fee on index fund accounts with a balance of less than $10,000.
- The custodial fee on traditional IRAs, Roth IRAs, and SEP?IRAs with a balance of less than $5,000.
- The low-balance fee on all nonretirement accounts with a balance of less than $2,500.
These have all been replaced with a single account service fee of $20 annually for each Vanguard fund with a balance under $10,000. Okay, that’s not too special. The good news is that if you agree to get electronic versions of statements and other documents, all the fees are waived!
The waiver is available immediately, so switch now 🙂 If you have $100,000 in total balances, you’re also fee-free. I already have everything set to deliver electronic format, so I’m all set. (Also you save lots of trees! Those prospectuses are thick.) In addition, you can still choose the “E-delivery and mail year-end-statement” option and get the fee waiver. That’s perfect for me.
I’ve always felt the $10 fees were justifiable, as if you were paying for things a la carte, because otherwise at 0.20% of say $5,000, that’s just $10 a year for IRS filings, paper, printing, postage, great customer service, and so on. Still, they were annoying. Even though my wife and I together have over $60,000 invested with Vanguard, we were still being hit with fees.
Now I’m less likely to switch to Vanguard’s ETF offerings, as I was considering for the future when I start putting money into taxable accounts. I prefer the simplicity of mutual funds.
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What do you mean by the ‘simplicity’ of mutual funds compared to ETFs? Looking at vanguard’s cost calculator, if you pay $0 in commissions (as I do through Wells Fargo), a dollar cost averaging investor can save thousands of dollars through the purchase of vanguard’s ETFs instead of buying the equivalent mutual fund. Your stated goal, which I agree with wholeheartedly, is to index and keep expenses low and remain tax efficient in taxable accounts. IF you have zero commissions, and IF you remain disciplined and do not trade ETFs the way some people trade individual stocks, ETFs, especially in a taxable account, will save thousands (or yield thousands, depending on how you look at it) over the long run. I think this extra return far outweighs any inertia to the status quo…
Simplicity is just that… simplicity.
– If I have a $4,000 IRA contribution and want to buy $4,000 of an index, I can buy it and be fully invested. There won’t be $100 sitting around earning nothing if I can’t buy a partial share of a $150 ETF like VTI.
– If I want to set up an automatic $500 per month investment split into 5 different funds, and have it taken directly from my checking account, I can get that too. I don’t have to remember to place trades, or worry about limit orders not filling, or getting bad prices for market orders.
– I get Vanguard’s great customer service. I don’t have to worry about the commissions going up or down, changes in promotional offers, whatever.
That’s not to say I don’t have a price. I’m still wait-and-see on these free trade brokers for the bulk of my money. If they become reliable with good service, I’m perfectly willing to switch. Since I wanted to open an account for trading with Zecco anyways (play money), I’m going to try to measure the loss due to bid/ask spreads and deviation from NAV that ETFs have.
hmmm, your first point is a good one, no refuting that (maybe that’s why i own so many mutual funds). but on the other hand, if you are just starting a position and don’t have 3 or 4k to invest, with zero commissions you can get yourself closer to fully invested sooner by not waiting for your stockpile of cash to grow (i.e., you don’t have to wait for the 3 or 4 grand to build up in your savings account before taking the plunge).
the second point, well i see the simplicity in the automatic investments (though to transfer $500 to a brokerage and make the trades is about five minutes extra work/month), but as for the ‘limit trades not going through’ or ‘getting bad prices for a market order’ – that part of your reasoning doesn’t hold water. you should not be using limit orders with index ETFs (a limit order with any of the great vanguard index mutual funds doesn’t exist – for good reason), and market orders for an ETF are no different than automatic mutual fund purchases (you don’t care that the price you get is at the end of the day when buying a mutual fund, because getting the right price isn’t the point for this strategy, so it shouldn’t be part of the reasoning when buying an index ETF). you do get hit by the bid-ask spread, and that’s the downside for ETFs as you already know (if it wasn’t for this spread ETFs would clobber mutual funds in all scenarios).
customer service – vanguard is great on that, but again, this strategy of diversified indexing shouldn’t take any customer service – buy,hold, wait and one day redeem.
as for commissions going up and down – they are only headed one way – down. my dad used to pay 60-90/trade back in the day – and that was a discount brokerage. now $10 seems like too much. free trades are here to stay, but your point is still well taken – somebody will always have free trades, but what if that someone is no longer zecco (or wells, or bofa, or whoever you might trade through)? of all of the concerns, this last one is the most pressing. BUT no one says you can’t take advantage of the free trades while they last, then go back to the old mutual fund system if they go away.
I’ll be curious to see what you find when you look at the data you generate from your Zecco account. I suspect with the vanguard index type ETFs, deviation from NAV shouldn’t be an issue (some other more focused/managed funds basically trade as individual stocks – that’s the reason why those should be avoided in my mind).
Schwab has also eliminated most of their fees recently. Their pricing guide hasn’t quite caught up with the new products they rolled out this week and last, but basically Schwab eliminated maintenance fees on all personal accounts (except the 529 and Defined Benefit Plan) regardless of balance.
I expect Vanguard to eventually do the same. Why? To capture the more savvy members of the 20-30 investing crowd, who are fee sensitive. If you built loyalty (by giving the same deal to low and high balance customers) when they are young (and low balance customers) you are more likely to keep them when they are older (and higher balance customers). If you alienate them every chance you get by dinging them with a fee, they may not stay your customers much longer.
Awesome news, I just started investing by opening Roth IRA with Vanguar last week and trying to figure out how to avoid the fees and diversify with only 4k per year. Cheers to Vanguard and Jonathan for the heads up!
Thanks for the heads up, this is great news!
thanks Jonathan! It looks like now there will be no minimums for Vanguards money market accounts. Suddenly, their tax exempt money market fund is looking like a nice place to park my emergency fund.
Well this is the worse possible news I’ve ever heard!
I only say that though since I just started my Roth with T Rowe Price about 3 weeks ago because I could be fee free there with automatic investments. Now what the heck do I do??? I’d love to get over to Vanguard, but with less than $100 in my current account, it seems kind of pointless to rollover. Maybe I’ll maintain 2 Roths? Whats everyones opinion on that?
But seriously, this is great news!
Yes, everyone switch to e-statements quick 🙂
Market orders and ETFs is a very interesting debate, and one of the reasons why I opened a Zecco account. Many people seem to hate market orders and think they’ll might get screwed by market makers, but I’m not sure either way.
Regarding NAV, check out VWO at ETFConnect and it’s NAV vs. share price history chart. It’s been pretty steadily above NAV. As of last close, the premium is to NAV is 1.06%. I don’t know about you, but to me that can wipe out a 0.10% expense ratio benefit for a long time, assuming you end up selling back near NAV.
Hey Jonathan,
Thank you for the alert…
P.S. My anti-spam word was “budget” …..haha 🙂
Great news! I just wish Vanguard had done this before I set up my 2006 Roth in temporarily commission-free ETFs at Ameritrade.
Johnathan,
I believe the premium on the ETF price versus NAV can be mostly explained based on the 0.5% purchase and redemption costs which are rolled back into the corresponding mutual fund (VEIEX).
Well, the corresopnding mutual fund has a 0.5% fee to buy/sell, so this makes them about even?
Thanks for the tip, that’s great news!
Great point again – I actually wasn’t aware of this share price to NAV discrepancy for these index type ETFs (though digging deeper I also found that this premium for VWO is in part due to the fact that international equities trade at different times of the day than the U.S. based ETF that tracks them – hence the ‘closing’ NAV and the ‘closing’ share price occur at different times of the day (in fact, usually the underlying NAV is closed while the share price is being traded and vice versa – those pesky time zones).
That said, my three ETFs, VV, VO, and VB (large, medium ,and small cap Vanguard index ETfs) still trade at a tiny premium to the underlying NAV). Quite frankly, I am a bit surprised by this discrepancy, after all, the information is completely public, so why wouldn’t large institutional arbitrageurs buy the underlying basket and sell the ETF and make money on the difference? It seems to me that over time as ETFs become more and more liquid, the NAV to price discrepancy might shrink – but I could be wrong.
On a more fundamental note, I tend to think of indexed funds or index ETFs as being part of the ‘random (upward, hopefully) walk.’ As such, the only forces that you can ‘control’ are 1.) expense ratio of the fund/ETF 2.) tax efficiency and 3.) diversification. When the day comes to sell a mutual fund you will get the NAV at the end of the day. Now if the market collapses minutes before the market closes (a terrible black swan like 9/11 for instance), you will lose substantial value on the sale. Likewise, a sudden uptrend just before you sell will yield a windfall. These are random events. Selling an ETF at a market order is a random event – you might get squeezed, or you might be selling at a certain point during the day when the market is at a peak. You could chose to place a limit order, but this would be just another form of timing the market – and this indexing strategy runs counter to such methodology. Likewise, NAV to price ratio may vary from minute to minute, day to day, year to year, and decade to decade, but this is randomness again, and as far as I can tell it is not an actual ‘expense’ the way commisions, bid ask spread, or expense ratios are. If you feel though that the current price>NAV situation is a premium that will eventually be wrung from the system, never to return, well then, ETFs with such a premium are going to be awful long term performers compared to their mutual fund counterparts. So then which is best. I don’t pretend to know the answers, just the variables.
Diehards discussion on VWO – Others say it is due to stale international pricing. For most ETFs, I don’t think the difference is too much either, I’m just pointing out there can be one.
As for the 0.5% fee on VEIEX, since that is paid into the fund, I don’t really think about it. The way I see it, it actually helps my return as long as I trade less than the average investor in the fund. It’s mainly to ding short-term traders.
Been a lurker here for a while, but this brings up a question. Today I buy Vanguard ETF funds at Etrade in my and my wife’s Roth IRA’s. I did it there because I wanted to avoid the fees at Vangard. Does it make sense next year to open Vanguard IRA’s and start buy there? Should I transfer my ETF’s from Etrade to Vanguard or just leave where they are?
From my perspective, they replaced a $10 fee (for under $10k) with a $20 fee. Lame. And I have three funds under 10k too.
It’s not like it was hard to avoid the other fees that this simplifies, given that most funds have a $3k minimum to start with.
Guess I have to switch to electronic delivery.
William – ETFs will be continue to be cheaper with respect to expense ratio, but you just have to compare that savings with the cost of a trade commission (and all the other junk we rambled about in the above comments). I don’t know that the transfer-out fees are for E-Trade, but I like having everything all in one place.
Have a question about ETF’s…
Since they are based on the underlying basket, it shouldn’t matter if someone buys like 1 million shares of that ETF, the price will still be stable correct?
As in, the price of the ETF is not based on normal buyer/seller but just value of the underlying basket…
Am I correct?
Without getting into ETFs in detail (I know there are some good links out there if you run a search), the ETF is based on normal buyer and seller, with the special case that new shares can be created and destroyed by certain entities.
Here is a simplified example. I imagine you have a “Soda ETF” consisting of Coke and Pepsi stocks. The value of those two stocks together might be $120. This is called the “net asset value”, or NAV. But the ETF might trade for the equivalent adjusted value in the range of $119-$121.
Why wouldn’t it sell for as low as $110? Because then an entity could simply buy a share of the ETF for $110, break it back down (destroy) it into COKE and PEP again, and sell it for $120 on the open market, netting some easy profit.
Same reason applies for why the ETF wouldn’t just sell for $130. They could simple buy one share of PEP and one share of COKE for $120, create a new share of the ETF, and sell it for $130, again making some easy money.
This is why the actual share prices of ETFs rarely deviate very much from NAV. But they still deviate a bit as it’s not worth creating or destroying units for small and likely temporary variances.
“And I have three funds under 10k too.”
Scott: Even if they do the simplifying, would saving $30 each year be worth viewing statements online and printing them out if you need to? I think so.
Can ETFs be restructrued the way mutual funds might e.g. coke and pepsi combo can be changed to coke and xyz OR coke and pepsi now be 50-50 and later the ratio is 70-50 ?
May be I am naive to think that Mutual funds can be changed the way I described in the example ?
Thanks for the post. This is great news!
Jonathan,
Their minimums still remain high compared to other brokers. It still weeds out the “small-time” investors with under 3k. Am I wrong?
I’d like to know if Denis is right too. I’m trying to get someone set up with vanguard but they can’t do 3000 off the bat.
Tom: I think this is the lowest minimum that Vanguard offers:
STAR
I ran into the same problem when setting up my IRA, had to go with my bank because I didn’t ever find this fund and I had less than 3K!
I’m with Scott—this sucks. I was paying NO fees, and just got socked with $40 worth of these new charges…after getting a letter from Vanguard telling me in three places “you will not be subject to these”. In effect, my expense ration just went from .34% ( on STAR ) to 1.44%.
I called and asked. “Postage costs”, they said. Somehow I don’t think they are paying anything like $20 a year even on their voluminous mailings. That’s a LOT of postage.
No, this is either a new profit device for them or their famed committment to low costs is eroding. Or maybe they just want to get rid of smaller investors.
And don’t be so happy about the e-delivery waiver. I’m old enough to remember when ATMs first came out. Oh, the lengths to which banks went to get us to use them! Because, you know, they were so much cheaper than tellers. And today? Fees for using ATMs, because they are “so expensive to buy and operate”.
Mark my words, a year or 2 hence there will be fees on those e-delivery accounts, too. Then what will we do?
Hi,
I’m American and live in Europe and consider an investment firm. Have you heard of Generali? I like their flexibility to let people choose the type of money (euro, dollars..) and I can live anywhere I want and contribute via credit cards (saving bank transfer fee, etc..).
The only concern I have is their fees
1. $4.5 monthly fee
2. 1.5% fee of total annually (which can eat up over 30 years)
3. Another 2% of total up to 10 years and then 0.3% after that.
I wonder if Vanguard and other American equivalent has this option? Otherwise it will cost me a lot to convert the money to dollars, send to my bank in US or wire internationally.
What are all fees typical charged by these American firms.
I really appreciate your advice.
Thanks.