October 16, 2013

Vanguard Moves to Merge Funds, Lower Costs

Two major announcements signal major product shakeup

(Photo: AP) (Photo: AP)

Maybe it was a tsk-tsk shake of the head from founder and elder-conscience John Bogle. Whatever the reason, Vanguard announced in a pair of releases on Wednesday that it will lower costs and streamline its fund lineup.

The fund behemoth, already known for its low-cost fee structure, said it will make the ultralow-cost Admiral Shares index funds available to more clients. The firm also said it plans to streamline its share class offerings by gradually phasing out Signal Shares. The latter announcement is part of a larger companywide effort to simplify its fund lineup, mainly through planned mergers with other Vanguard funds, the company said.

Vanguard introduced Admiral Shares in November 2000 to “recognize and encourage the cost savings associated with large and long-tenured accounts by passing along these savings to shareholders in the form of lower fund expense ratios.”

In October 2010, Vanguard lowered the minimum investment requirements to qualify for the Admiral Shares for most retail clients from $100,000 to $10,000 and removed tenure requirements.

Today, the firm announced it will eliminate minimum requirements altogether for 41 of its Admiral Share funds as Signal Shares are folded in.

“Over the past five years, we have moved to simplify our funds and our overall fund lineup,” Vanguard CEO Bill McNabb said in a statement. “In a continuation of that effort, we have decided to merge a handful of funds that have similar objectives and strategies.”

The changes are summarized below:

Individuals gain access to Admiral Shares of eight funds. For eight of its index funds, Vanguard today changed the name of Signal Shares to Admiral Shares, a move that enabled retail clients with a minimum investment of $10,000 to qualify for the lower-cost shares. For example, Signal Shares of the $7 billion Vanguard Short-Term Corporate Bond Index Fund have been renamed Admiral Shares. The Admiral Shares will retain the ticker of VSCSX and the name change is expected to have no impact on the expense ratio, which is 0.12% as of the last fiscal year.

Admiral Share minimums eliminated for 24 funds. Beginning today, Vanguard is eliminating the $10,000 minimum investment required for financial advisors and institutions to qualify for Admiral Shares of 14 index funds, and the $100,000 minimum investment required for Admiral Shares of 10 sector index funds. This will be the first time these funds (which do not currently offer Signal Shares) will be available to advisors and institutions without a minimum.

Admiral Share minimums eliminated for 17 funds; Signal Shares to convert. Vanguard is also eliminating the $10,000 minimum investment required for financial advisors and institutions to qualify for Admiral Shares of 17 index funds that currently offer Signal Shares. Vanguard plans to convert these Signal Shares to Admiral Shares in October 2014, although clients have the option to immediately convert their shares on a tax-free basis.

McNabb noted the success of Admiral Shares in lowering the cost for clients, stating that before the announcement more than $700 billion was held in the share class, which accounts for about one-third of Vanguard’s nearly $2.3 trillion in U.S. fund assets under management.

But the news didn’t stop there.

Vanguard also said it plans to merge the $16.3 billion Vanguard Developed Markets Index Fund with the $18.4 billion Vanguard Tax-Managed International Fund. The funds share similar holdings and seek to track the same benchmark — the FTSE Developed ex North America Index. The merged fund—to be named Vanguard Developed Markets Index Fund—will offer Investor, Admiral, Institutional, Institutional Plus and ETF Shares.

Two funds that seek to track the Standard & Poor’s 500 Index will also be merged. The $3 billion Vanguard Tax-Managed Growth and Income Fund will be merged with the $143 billion Vanguard 500 Index Fund.

A merger of the $738 million Vanguard Growth Equity Fund and the $4.4 billion Vanguard U.S. Growth Fund is also planned.

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Check out Vanguard’s Davis: Persistent Level of U.S. Debt ‘Biggest Issue of Our Lifetime’ on ThinkAdvisor.

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