Low-fee leader: Sometimes Vanguard fund expenses rise, too
As markets fall, fund prices firm
While Vanguard Group is famous for driving down mutual fund fees, "52 Vanguard funds saw their expenses rise rather than fall over the past 6 months," notes Dan Wiener, Brooklyn-based publisher of the Independent Adviser for Vanguard Investors newsletter, citing fund documents sent shareholders and the Securities and Exchange Commission.
Wiener found the self-reported Vanguard fee increases, mostly "a mere single basis point," when comparing Vanguard year-end fund reports for Dec. 31, 2015 with midyear reports for June 30, 2015. The affected funds include Vanguard's S&P 500 Index and Admiral 500 Index shares and Total Stock Market ETFs, among others. Since fees were lower at year-end than they were a year earlier (Dec. 2014), lower expenses in early 2015 must have "reversed course" and boosted fees a bit in the latter half of 2015, Wiener writes.
Did the fee hikes result from unusual Vanguard expenses? Any seasonal factors? "I would term it environmental," spokesman John Woerth told me. Early 2015 expense reductions "reflect strong cash flows and strong markets" over the previous year, allowing Vanguard to spread fixed costs across more managed assets, dropping costs by fractions of a cent per dollar invested. But "flows moderated and markets retreated in the latter half of the year," bumping costs modestly higher.
Woerth also cited the incentives Vanguard pays to reward successful fund managers and the penalties it extracts from underperformers in the form of lower compensation. Hiring new fund advisers can boost expense ratios.
On review, Wiener found that Vanguard indeed paid significantly higher fees to managers of its U.S. Value, Windsor II, Growth & Income, Strategic Equity and Equity Income funds, among others, in the first half of 2015, when markets were stronger; those fees went down significantly in the second half, when markets were weaker. (Those weren't among the funds where Wiener recorded higher second-half customer fees.)
Woerth says it's more important to remember that, on an annualized basis, Vanguard fees continued to trend down, with 130 Vanguard funds reporting lower fees at year-end 2015 than year-end 2014, "saving our clients $142 million" versus what Vanguard could have collected if it hadn't chosen to cut fees again.
Over time, Vanguard fees continue to mostly drop, though not as fast as the company adds new assets.