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Vanguard Targets Arbitrage in International Funds

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April 25, 2003 — Vanguard Group will add redemption fees to some of its international stock funds in June in an effort to discourage investors from trying to profit from time and pricing differences between U.S. and foreign markets.

The fees are aimed at curbing “limited arbitrage activity currently evident,” said Gus Sauter, a managing director in charge of Vanguard’s quantitative equity group, which oversees its index funds.

The 2% fees will apply to shares purchased on or after June 27 and held less than two months.

The fees will be added to three actively managed portfolios: Vanguard International Growth (VWIGX), Vanguard International Value (VTRIX), and Vanguard International Explorer (VINEX).

They will also be added to Vanguard Developed Markets Index (VDMIX); Vanguard Instl Developed Markets Index (VIDMX); Vanguard Total Internatl Stock Index (VGTSX); Vanguard European Stock Index (VEURX); Vanguard Pacific Stock Index (VPACX); and Vanguard Emerging Markets Stock Index (VEIEX).

Frequent buying and selling by arbitrageurs forces fund managers to buy and sell securities far more often than they otherwise would, resulting in higher transaction costs, which lower returns, Vanguard said.

A redemption fee to discourage arbitrage trading previously was added to the Vanguard Tax Managed International (VTMGX). Vanguard said it also has limited telephone or online share exchanges for its international funds since January 2002 to deter this type of trading, but while this helped, the company felt stronger measures were needed.


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