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Vanguard Removes Back-End Loads and Fees

Good for investors, but will this be a salve for managers?


You might think the big news this week has been the fallout from the Facebook IPO debacle, or the gamesmanship around the Greek bailout (or lack thereof). But in my book, the big news is that Vanguard has stripped the back-end loads off of virtually all of its funds.

Announced this morning, Vanguard has removed the onerous back-end trading fees on most of its foreign equity funds; removed the one-year, 2% loads on the sector funds; and also gotten rid of the 1% back-end loads on closed funds like the PRIMECAP-run funds, and others like High-Yield Corporate (MUTF:VWEHX) and Selected Value (MUTF:VASVX). Only World ex-U.S. SmallCap (MUTF:VFSVX) and Global ex-U.S. Real Estate (MUTF:VGXRX) retain back-end loads or fees.

Why are they doing this, you might ask? Vanguard says it’s because the frequent trading it was trying to control just isn’t an issue any longer (if it ever was). I also would bet that computer systems that block investors who trade into, or out of, funds with rapidity or regularity have become good enough that the extra fees just aren’t needed.

In addition, back-end fees reflect poorly on a company that wants to be seen as consumer-friendly, and it wouldn’t surprise me if some portfolio managers told Vanguard that with zero-transaction-fee ETFs as competition, asset flows simply were not keeping up with expectations.

Remember: Vanguard gets away with paying its outside managers very low fees in part because it can claim that its vast size will bring more assets the managers’ way. It’s the volume model. But maybe that’s not working so well for the outside managers. Vanguard certainly won’t say, but it’s a possibility.

I took a look at the actively-run funds that are having the fees taken off, and all of them but one — the brand-new Emerging Markets Select Stock (MUTF:VMMSX) — have seen net asset outflows (redemptions) during the past six months and past year. The move obviously is a positive for shareholders and, hopefully, keeps the active managers happy if it means there’s incrementally more interest in their funds now that the restrictions have come off.

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