This article was last updated on December 3
Vanguard and Fidelity are widely known for their low cost index and mutual funds. Their low expense fees/costs and broad array of funds have made them the fund manager of choice for many individuals, corporations and trusts. So its no surprise that they are the biggest of the fund managers and market makers out there. I have been an investor with both of them for many years and was a bit taken aback to receive the following notice from Vanguard regarding a fee increase for one of the funds I have with them:
From: “Vanguard” <[email protected]>
Subject: New fees for Vanguard International High Dividend Yield Index Fund
Date: November 30, 2016 at 10:40:45 AM EST
Effective February 7, 2017, Vanguard International High Dividend Yield Index Fund will charge a 0.25% fee on all share purchases, including those made by exchange from another Vanguard fund. Reinvested dividend or capital gains distributions won’t be subject to the purchase fee.
In addition, the fund will charge a 0.25% fee on share redemptions. This fee will apply if you redeem shares by selling or exchanging to another Vanguard fund or if Vanguard liquidates your fund account because the balance has fallen below the minimum requirement for any reason, including market fluctuation.
The addition of fees will better position the Fund to accommodate future large cash flows by helping to lessen the impact of trading costs. Unlike a sales charge or a load paid to a broker or fund management company, purchase and redemption fees are paid directly to the fund to offset the costs of buying and selling securities. The fund’s ETF Shares (VYMI) won’t be subject to the fee. For additional information about purchase and redemption fees, see the fund’s prospectus.
The reason I lump these two behemoths of the mutual fund management industry is that due to their sheer size (measured as funds under management) they are pretty much in a league of their own relative to other fund managers. This also makes them ultra competitive with each other so generally what one does, the other follows. Over the last few years this has worked well for investors as they have been aggressively cutting expense ratios (fund fess) for their flagship funds. But when I got the innocuous looking notice for a new Vanguard fund fee, it leads me to think Fidelity will be doing the same. Worse I think it can spread to other funds and fund managers, who often take the lead from these big players.
Now I know this is only one fund and a redemption fee of 0.25% may not sound like a big deal. But fees can eat into fund returns and it does suggest to me that trading costs have reached their nadir and funds are now going to look for other ways to make money. This fee is also troubling because it sounds like they don’t want money to be as easily taken out of the funds and discourage smaller investors who cannot meet the minimum amounts ($3,000). They are justifying it by saying this will offset trading costs, but something smells fishy here.
What are your thoughts? Do you think this if for this fund only or a trend likely to be seen across other funds in the years to come?