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Vanguard reports lower expense ratios for 21 fund shares

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Vanguard clients saved a total of nearly USD25 million as a result of lower expense ratios for 21 individual mutual fund shares, including three quantitative equity funds and six target-date funds.

Last month, the firm reported lower expense ratios for shares of 35 funds representing aggregate savings of USD13 million.
 
This second wave of Vanguard funds to report expense ratio changes encompasses funds with fiscal years that ended in September 2016. Vanguard will announce any additional expense ratio changes as funds update their prospectuses in the coming months.
 
Expense ratios represent the actual operating expenses for the prior fiscal year (including investment advisory fees, administrative costs, and shareholder-service expenses) and are reported on an annual basis in the prospectus in accordance with Securities and Exchange Commission requirements.
 
Vanguard has consistently lowered its fund and exchange-traded fund (ETF) expense ratios as a result of asset growth from strong cash inflows and positive fund performance. Under Vanguard’s mutual operating structure, economies-of-scale savings are passed directly to fund investors in the form of lower expense ratios. The reductions span the firm’s full range of investment strategies (traditional active, quantitative active and index); product type (traditional fund and ETF); and fund type (stock, balanced, bond, and money market fund).
 
In this latest set, Vanguard funds declaring expense ratio reductions include:
 
Quantitative equity funds – The expense ratio of the USD6.6 billion Vanguard Strategic Equity Fund dropped three basis points to 0.18 per cent, that of the USD1.5 billion Vanguard Strategic Small-Cap Equity Fund dropped five basis points to 0.29 per cent, and that of the USD1.5 billion Vanguard US Value Fund dropped three basis points to 0.23 per cent. 
 
These funds are managed by Vanguard’s Quantitative Equity Group (QEG), which was started in 1991 by Vanguard founder John C. Bogle and then-Chief Investment Officer Gus Sauter. Today, QEG manages about USD30 billion across 34 mandates, including the USD2 billion Vanguard Market Neutral Fund, for which it was named Morningstar’s 2015 Alternatives Fund Manager of the Year. QEG broadened its offerings in recent years to Vanguard’s institutional and advised clients; it now manages the USD244 million Vanguard Alternative Strategies Fund, as well as Vanguard’s factor funds offered in the United States and abroad, including the USD1.6 billion Vanguard Global Minimum Volatility Fund.
 
Target retirement funds – Six Vanguard Target Retirement Funds (TRFs) saw their expenses drop by 1 basis point each, including the USD10.5 billion Vanguard Target Retirement Income Fund, the USD5.6 billion Vanguard Target Retirement 2010 Fund, and the USD17 billion Vanguard Target Retirement 2025 Fund. Their expense ratios fell to 0.13 per cent for both the Target Retirement Income Fund and the Target Retirement 2010 Fund, and to 0.14 per cent for the Target Retirement 2025 Fund. Three institutional target-date funds – the USD2.2 billion Vanguard Institutional Target Retirement Income Fund, the USD2 billion Vanguard Institutional Target Retirement 2010 Fund, and the USD6.3 billion Vanguard Institutional Target Retirement 2015 Fund—reported lower expense ratios of 0.09 per cent. (The 2010 funds are closed to new investors pending an announced merger in summer 2017 with their respective retirement income funds.)
 
Vanguard TRFs for individuals now have expense ratios ranging from 0.13 per cent to 0.16 per cent, and TRFs for institutional investors have ratios ranging from 0.09 per cent to 0.10 per cent. Vanguard – the largest provider of target-date funds, with USD450 billion in assets under management – estimates that USD6 out of every USD10 invested in target-date strategies in the United States goes into an index-based Vanguard TRF.
 
Investments in TRFs are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
 
Traditional active equity funds – A total of six traditional active equity portfolios, some with multiple share classes, announced lower expense ratios, including the USD952 million Vanguard Capital Value Fund, whose expense ratio decreased by 25 basis points to 0.25 per cent. In this instance, the significant decrease is largely a result of a performance-based advisory fee adjustment.
 
Vanguard aligns the interests of its external investment advisory firms with those of shareholders by using incentive/penalty arrangements. Under the majority of Vanguard fund advisory agreements, an external advisor’s base advisory fee can be adjusted up or down to reflect the fund’s investment performance relative to the total return of an appropriate market benchmark over a 36- or 60-month period. In effect, the advisor is rewarded for outperforming a market benchmark and penalised for underperforming it. Vanguard is one of the few firms in the industry to employ performance incentive/penalty arrangements.
 
Admiral Shares of the USD10.8 billion Vanguard Morgan Growth Fund reported an expense ratio increase of 1 basis point to 0.28 per cent. The change is also largely a result of a performance-based advisory fee adjustment. Morgan Growth is the only fund in this set to report an increase.
 
Other traditional active equity funds reporting reductions include Vanguard PRIMECAP Fund, Vanguard PRIMECAP Core Fund, and Vanguard Wellesley Income Fund, which all saw expense ratio reductions of 1 basis point, and Vanguard Global Equity Fund, which saw a reduction of 6 basis points. In aggregate, Vanguard’s active equity funds have an average expense ratio of 0.27 per cent, compared with the average expense ratio for all active stock funds industrywide of 1.14 per cent.
 
Vanguard Short-Term Inflation-Protected Securities Index Fund also reported expense ratio declines of 1 basis point for its Investor, Admiral, Institutional, and ETF share classes. 

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