Vanguard Launches 'Assault' On ETFs

October 17, 2013

Firm’s move levels the playing field between its ETFs and mutual funds.

The title is tongue in cheek, but for investors and advisors, the truth is real: Vanguard’s new pricing move makes its mutual funds (in some cases) a better—or at least cheaper—choice for advisors.

Vanguard this week substantially lowered the barrier for advisors to access its lowest-cost “Admiral” share class for a wide variety of its index mutual funds. Advisors can now choose between ETF and mutual fund share classes and pay (in most cases) exactly the same annual fee, with no strings attached.

If advisors behave rationally, many (or some) will side with mutual funds.

What Did They Announce?

To understand the changes that Vanguard made this week, you first have to understand Vanguard’s fund structure.

For every area of the market that the company wants to provide exposure to, it runs one single pool of assets. It has one S&P 500 “fund”; one Total Stock Market “fund”; and one Technology “fund.”

Because some accounts are cheaper than others to maintain, Vanguard offers different share classes with different fees and different rules.

For instance, the Vanguard Total Stock Market Index Fund is accessible to individual investors in the following ways:

  • Investor Shares (VTSMX): Mutual fund shares available with a $3,000 minimum, charging 0.17 percent in annual fees

  • Admiral Shares (VTSAX): Mutual fund shares available with a $10,000 minimum, charging 0.05 percent in annual fees
  • Signal Shares (VTSSX): Mutual funds shares available to advisors with no minimum and 0.05 percent in annual fees
  • ETF (VTI | A-100): ETF share class available with no minimum, charging 0.05 percent in annual fees

(For those of you keeping score, there are also “Institutional” and “Institutional-Plus” share classes, which charge fees of 0.04 percent and 0.02 percent and have minimums of $100 million and $200 million, respectively.)

Of these share classes, the one that always confused people the most was the “Signal Shares.” Signal Shares were developed by Vanguard as a way to offer financial advisors access to ultra-low-cost shares. In many ways, they were great. As long as your advisory house filled out some paperwork with Vanguard, you could get Admiral-share class pricing without the minimum individual account sizes required by traditional Admiral Shares.

But the Signal Shares had a problem: They weren’t available on all of Vanguard’s funds. There were no Signal Shares for the firm’s sector products. Certain other corners of the market weren’t covered either. An advisor who wanted access to the full slate of products couldn’t count on Signal Shares being available.

This week, Vanguard changed that. The firm announced plans to eliminate the Signal Shares, converting them into the Admiral Share class. Then, to make things easier for investors, it eliminated the investment minimums on a broad array of its Admiral Shares.

If you’re an advisor, you no longer have to invest $100,000 to open an Admiral Shares account for Vanguard’s sector products. You no longer need to cough up $10,000 to access the cheap version of the Vanguard FTSE All World Ex-US mutual fund.

It’s easy to get lost in the minutiae of Vanguard’s press release and its multishare-class structure. But essentially, what the firm is saying is that advisors can now access the Admiral Shares for most mutual funds with no restriction. As a result, they can buy mutual fund or ETF shares at essentially the same price.


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