Author Topic: Vanguard continuing to lower Expense Ratios  (Read 5854 times)

Eric

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Vanguard continuing to lower Expense Ratios
« on: February 25, 2016, 11:31:09 AM »
Just logged into my Vanguard account and noticed the following update:

"As of 02/25/2016, the expense ratio on your Vanguard Total International Stock Index Fund Admiral Shares has changed from 0.14% to 0.12%."

That's an incredible expense ratio for an interanational fund.  Now all we need is some positive performance!  :)


Seppia

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Re: Vanguard continuing to lower Expense Ratios
« Reply #1 on: February 25, 2016, 12:02:32 PM »
I had the same positive surprise when I checked the euro ETF a month or two ago.
I have moved back to Europe, so it makes sense for me to be over indexed on this market.
I could have sworn that the expense rations for us unlucky Europeans was like 0.25 and was surprised to find it at 0.12.

soccerluvof4

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Re: Vanguard continuing to lower Expense Ratios
« Reply #2 on: February 25, 2016, 12:16:22 PM »
I just went to check mine and it too is .12 but i didnt get any notification. In any case, yes its great news!

dandarc

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Re: Vanguard continuing to lower Expense Ratios
« Reply #3 on: February 25, 2016, 12:21:19 PM »
Just making that back-tax bill even bigger when the IRS gets wise to Vanguard's low fees being illegal.

Mr FrugalNL

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Re: Vanguard continuing to lower Expense Ratios
« Reply #4 on: February 25, 2016, 12:32:52 PM »
Just logged into my Vanguard account and noticed the following update:

"As of 02/25/2016, the expense ratio on your Vanguard Total International Stock Index Fund Admiral Shares has changed from 0.14% to 0.12%."

Its ETF share class, VXUS, has gone from 0.14% to 0.13%. Every little bit helps!

Heckler

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Re: Vanguard continuing to lower Expense Ratios
« Reply #5 on: February 26, 2016, 01:44:08 PM »
When exchange rates can easily fluctuate 30%, does 0.02% really make a difference?

Eric

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Re: Vanguard continuing to lower Expense Ratios
« Reply #6 on: February 26, 2016, 02:06:42 PM »
When exchange rates can easily fluctuate 30%, does 0.02% really make a difference?

Ohhh, look at mister big spender here!  :)

MustacheAndaHalf

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Re: Vanguard continuing to lower Expense Ratios
« Reply #7 on: February 26, 2016, 02:13:55 PM »
Just making that back-tax bill even bigger when the IRS gets wise to Vanguard's low fees being illegal.
Only if iShares (ITOT, expense ratio 0.03%) and Schwab (SCHB, expense ratio 0.03%) are next.
Those two funds have fees even lower than Vanguard Total Stock Market ETF (0.05% expense ratio).

Seppia

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Re: Vanguard continuing to lower Expense Ratios
« Reply #8 on: February 26, 2016, 02:21:27 PM »

When exchange rates can easily fluctuate 30%, does 0.02% really make a difference?

This doesn't make any sense
A fee is a fee, exchange rates fluctuate, they can favor you or not.
Fees you can control, exchange rates you cannot

bobechs

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Re: Vanguard continuing to lower Expense Ratios
« Reply #9 on: February 26, 2016, 03:43:11 PM »

When exchange rates can easily fluctuate 30%, does 0.02% really make a difference?

This doesn't make any sense
A fee is a fee, exchange rates fluctuate, they can favor you or not.
Fees you can control, exchange rates you cannot

Right,

Living in a tsunami zone you can't control how big the next one will be.
All you can do is be sure to wear your overshoes on tsunami days.

Living on the side of a volcano you can't control when flaming lava bombs will be dropping into the living room.
All you can do is keep the thermostat set low and get an automatic pilot light for the water heater

Living in an avalanche alley...

Well, you get the idea.

Aphalite

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Re: Vanguard continuing to lower Expense Ratios
« Reply #10 on: February 26, 2016, 04:03:27 PM »
Only if iShares (ITOT, expense ratio 0.03%) and Schwab (SCHB, expense ratio 0.03%) are next.
Those two funds have fees even lower than Vanguard Total Stock Market ETF (0.05% expense ratio).

I believe dandarc was being sarcastic, but your point is moot

It's not an apples to apples comparison, Schwab and Blackrock offers those as loss leaders to get people in the door because Vanguard structured their companies unfairly, giving their shareholders a benefit to avoid paying taxes (the investors/owners eventually pay taxes upon sale if in a taxable account, but during the time frame where Vanguard avoided taking a market profit on its services because the investors in the funds ARE the owners of Vanguard, it's helping those investors evade taxes. Of course, in a retirement account, you are completely evading taxes). It'd be different if Vanguard either 1) set up as an exempt "not-for-profit" organization, but this would require them to disclose executive compensation (ever ask yourself why Vanguard didn't set themselves up this way if they really wanted to operate at break-even?), or 2) structured their companies so that the funds and the fund manager were not related companies, and thus the fund manager would be charging a "market" rate in order to cover compensation to its managers (last I looked, about 1/3 of Vanguard's assets under management are not actually index funds, but actively managed funds).

You can argue that it's moral for Vanguard to artifically charge a lower expense ratio so the Company doesn't have to pay taxes, thus passing that advantage to its investors/owners, but the law is the law, and transfer pricing exists for a reason. There's all this outrage amongst the public when Corporations refuse to bring international earnings back into the US and be subject to double taxation, but Vanguard's "halo" effect seems to make it immune to criticism when it comes to tax evasion.

nobodyspecial

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Re: Vanguard continuing to lower Expense Ratios
« Reply #11 on: February 26, 2016, 04:19:23 PM »
It's not really transfer pricing if the companies are in the same country and benefitting the same owners.
That's like claiming REI (or MEC) avoid taxes by only charging their members cost price for the goods


Aphalite

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Re: Vanguard continuing to lower Expense Ratios
« Reply #12 on: February 26, 2016, 05:21:08 PM »
It's not really transfer pricing if the companies are in the same country and benefitting the same owners.
That's like claiming REI (or MEC) avoid taxes by only charging their members cost price for the goods

No its not. REI in this instance has a business model where they do not attempt to make as much money from marking up the goods they sell to members, but from subscriptions. They then pay taxes on those subscription fees. You're thinking of a situation where a company is transferring profit offshore. Vanguard is transferring profit directly to owners, helping them avoid corporate taxation during the process

nobodyspecial

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Re: Vanguard continuing to lower Expense Ratios
« Reply #13 on: February 26, 2016, 08:39:32 PM »
Not wanting to start a flame war.
REI and MEC are owned by their members, they try not to make a profit at all. The membership fee is $5 for life  I don't think they make a profit on the fee (when I joined - apparently it's now $20!)

In the same way Vanguard aim not to make a profit since they are owned by their members.

povertystrickenbastard

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Re: Vanguard continuing to lower Expense Ratios
« Reply #14 on: February 26, 2016, 09:44:29 PM »
In the same way Vanguard aim not to make a profit since they are owned by their members.

Since we the investors own it, what happens if Vanguard get sued for billions of dollars?  We have to pay up?  Or MERs go up to raise the money etc?

JetBlast

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Re: Vanguard continuing to lower Expense Ratios
« Reply #15 on: February 26, 2016, 11:23:29 PM »

No its not. REI in this instance has a business model where they do not attempt to make as much money from marking up the goods they sell to members, but from subscriptions. They then pay taxes on those subscription fees.
REI makes a relatively small amount off memberships, and a whole lot more off selling goods. It's a little out of date at this point but here's a link to 2011 financials. I honestly had no idea how REI ran their business until I started digging tonight.

http://www.rei.com/content/dam/documents/pdf/2011%20REI%20Financial%20Statements.pdf

Highlights include 42.5% gross margins and an operating margin of 6.46% for operating income of over $116 million. Membership sales totaled $16.837 million out of nearly $1.8 billion in sales.

They offset most of their taxable income through the annual dividend, which qualifies as a patronage dividend allowing a cooperative corporation to reduce taxable income by the amount of the dividend. They still reported a net income of $30 million and sent Uncle Sam over $16 million for income tax.

That's why REI isn't comparable to Vanguard. REI is incorporated as a cooperative and pays out most profits as patronage dividends. Vanguard has never made reference to cooperative corporate structure.

obstinate

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Re: Vanguard continuing to lower Expense Ratios
« Reply #16 on: February 27, 2016, 01:45:59 AM »
In the same way Vanguard aim not to make a profit since they are owned by their members.

Since we the investors own it, what happens if Vanguard get sued for billions of dollars?  We have to pay up?  Or MERs go up to raise the money etc?
Probably a payment plan would be set up, since Vanguard does not have the assets to pay a lump sum. If the payment period were ten years, then fees might go up by 50%. If it were thirty years, they might go up by 16%. Not a big deal, as low as Vanguard's fees are.

MustacheAndaHalf

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Re: Vanguard continuing to lower Expense Ratios
« Reply #17 on: February 27, 2016, 09:11:55 PM »
Only if iShares (ITOT, expense ratio 0.03%) and Schwab (SCHB, expense ratio 0.03%) are next.
Those two funds have fees even lower than Vanguard Total Stock Market ETF (0.05% expense ratio).
I believe dandarc was being sarcastic, but your point is moot

It's not an apples to apples comparison, Schwab and Blackrock offers those as loss leaders to get people in the door because Vanguard structured their companies unfairly ...

You can argue that it's moral for Vanguard to artifically charge a lower expense ratio so the Company doesn't have to pay taxes, thus passing that advantage to its investors/owners, ...
You think two Total US Stock Market ETFs are not comparable?  That doesn't make any sense.  And your claim that ITOT is a "loss leader" needs proof.  When I look at Morningstar's page for ITOT, there's no "expense waiver" listed.  Unless you can show otherwise, ITOT doesn't seem to be getting reimbursed for an overly low expense ratio:
http://financials.morningstar.com/etfund/operations.html?t=ITOT&region=usa&culture=en-US

Also I never said anything about morality, so don't claim you're quoting me on that.  You're creating an argument with yourself.
« Last Edit: February 27, 2016, 09:25:14 PM by MustacheAndaHalf »

Heckler

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Re: Vanguard continuing to lower Expense Ratios
« Reply #18 on: February 27, 2016, 09:43:03 PM »

When exchange rates can easily fluctuate 30%, does 0.02% really make a difference?

This doesn't make any sense
A fee is a fee, exchange rates fluctuate, they can favor you or not.
Fees you can control, exchange rates you cannot

Right,

Living in a tsunami zone you can't control how big the next one will be.
All you can do is be sure to wear your overshoes on tsunami days.

Living on the side of a volcano you can't control when flaming lava bombs will be dropping into the living room.
All you can do is keep the thermostat set low and get an automatic pilot light for the water heater

Living in an avalanche alley...

Well, you get the idea.

Love it.  Nice work!

dandarc

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Re: Vanguard continuing to lower Expense Ratios
« Reply #19 on: February 28, 2016, 12:19:53 PM »
Only if iShares (ITOT, expense ratio 0.03%) and Schwab (SCHB, expense ratio 0.03%) are next.
Those two funds have fees even lower than Vanguard Total Stock Market ETF (0.05% expense ratio).

I believe dandarc was being sarcastic, but your point is moot

It's not an apples to apples comparison, Schwab and Blackrock offers those as loss leaders to get people in the door because Vanguard structured their companies unfairly, giving their shareholders a benefit to avoid paying taxes (the investors/owners eventually pay taxes upon sale if in a taxable account, but during the time frame where Vanguard avoided taking a market profit on its services because the investors in the funds ARE the owners of Vanguard, it's helping those investors evade taxes. Of course, in a retirement account, you are completely evading taxes). It'd be different if Vanguard either 1) set up as an exempt "not-for-profit" organization, but this would require them to disclose executive compensation (ever ask yourself why Vanguard didn't set themselves up this way if they really wanted to operate at break-even?), or 2) structured their companies so that the funds and the fund manager were not related companies, and thus the fund manager would be charging a "market" rate in order to cover compensation to its managers (last I looked, about 1/3 of Vanguard's assets under management are not actually index funds, but actively managed funds).

You can argue that it's moral for Vanguard to artifically charge a lower expense ratio so the Company doesn't have to pay taxes, thus passing that advantage to its investors/owners, but the law is the law, and transfer pricing exists for a reason. There's all this outrage amongst the public when Corporations refuse to bring international earnings back into the US and be subject to double taxation, but Vanguard's "halo" effect seems to make it immune to criticism when it comes to tax evasion.
I don't think it is a halo effect at all - I think the fact is the whistle-blower case was simple cash-grab that failed miserably because the case had no merit.  I know it was dismissed because of ethical misconduct by the whistle-blower, but Vanguard has been operating openly with this structure for over 40 years.  Surely if the IRS thought it could win on these grounds, it would have tried by now, yes?  We're talking billions of dollars here, after all.

Keep in mind the transfer pricing rules are there to ensure the proper amount of income tax is being paid on profit that actually happens, not to enforce any rules for a competitive (anti-competetive? we are talking about dictating higher prices here) marketplace.  So they are generally applied in the case of multi-national corporation where artificial price levels are used to off-shore profits to lower-tax jurisdictions.  So the classic example is: our company would have made $100M in profit in the US, but our Irish subsidiary is charging us $80M extra for parts that we could have bought on the open market for a much lower price, so we only made $20M in the US and we made $80M in Ireland.  Or sometimes to transfer profits from a for-profit subsidiary to a non-profit parent.  But Vanguard Group is not doing either of those things.

What Vanguard Group is accused of doing is not transferring profits to an off-shore subsidiary or non-profit, but to pass-through entities - The Vanguard Mutual Funds.  Which means the supposed profit that Vanguard Group is not earning because of it's low prices is ultimately taxed - as the income of the investors in the Vanguard Mutual funds.  It is as if a bunch of us Mustachian IT-contractors formed a C-Corp to handle the paperwork and billing and other odds-and ends for us to cut out the middle-men who are, in our opinion, charging too much for their services.  Any profit our C-Corp didn't earn is more profit that our Individual S-Corps did earn - the fees paid to the C-Corp are expenses to our business after all, so if those expenses are lower, our individual earnings are higher.  And we'll pay tax on those increased earnings in our individual S-Corps as the income is passed through to the owners of the S-Corps.  If the IRS can dictate a price to Vanguard, it can also dictate a price to our billing Co-Op.

I think a lot of the "Vanguard is doing something wrong" opinion's that are out there come from the idea that mutual funds are tax-exempt entities - they are not.  They are pass-through entities - taxes are paid on the income the mutual funds earn, just not by the mutual funds themselves.  Also the idea that the the transfer-pricing rules are there to somehow even the playing field and dictate that certain brokers and advisers charge more for their services is absurd.
« Last Edit: February 28, 2016, 12:23:02 PM by dandarc »

obstinate

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Re: Vanguard continuing to lower Expense Ratios
« Reply #20 on: February 28, 2016, 01:27:03 PM »
Also worth noting: while all the articles about this cite tax experts that claim it would be a slam dunk for the IRS to hit Vanguard, all the articles I've read cite experts who are in the employ of the "whistle-blower" lawyer. Vanguard did settle with Texas, but the supposed criminal investigation in CA is also, again, something we've only heard about from the "whistle-blower" himself. No independent corroboration.

Cathy

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Re: Vanguard continuing to lower Expense Ratios
« Reply #21 on: February 28, 2016, 01:37:42 PM »
Also worth noting: while all the articles about this cite tax experts that claim it would be a slam dunk for the IRS to hit Vanguard, all the articles I've read cite experts who are in the employ of the "whistle-blower" lawyer. ...

Indeed. In another thread about this issue, I cited a few cases for the proposition that expert evidence on domestic law is generally inadmissible in court, and one reason for that is that the courts evaluate legal arguments on their merits, not based on whether an alleged expert lawyer is willing to assert that the argument has merit. It's not hard to find a lawyer willing to assert that an argument has merit, but that's a separate question from whether it actually has merit. One of the quotes I posted in that earlier post is particularly apt: "Given the proclivity of our brothers and sisters at the bar, it can be expected that ... legal experts will differ over the principles applicable to the case." Sepcht v. Jenson, 853 F 2d 805, 809 (10th Cir 1988).

I don't put a lot of stock in assertions of merit made by alleged experts, whether regarding legal issues or any other subject. Instead, I actually look at the arguments and evaluate them.
« Last Edit: February 28, 2016, 01:46:44 PM by Cathy »