Looking Under the Hood at Vanguard Charitable
It's arguably the best donor-advised fund affiliated with an asset-management firm for donors who plan to maintain higher account balances.
With $10.8 billion in assets as of June 30, 2020, Vanguard Charitable Endowment Program ranks as the third-largest donor-advised fund affiliated with an asset-management firm in the United States, falling behind Fidelity Investments Charitable Gift Fund and Schwab Charitable Fund. For investors who plan to maintain larger account balances, though, it’s arguably the best option. It offers the lowest administrative costs for higher account balances as well as a rock-solid investment lineup.
As I covered in a recent article, donor-advised funds have several advantages. Donor-advised funds are public charities that qualify as section 501(c)(3) organizations. That means donors can benefit from an immediate tax deduction when they contribute cash or other assets to the fund. Although contributions are irrevocable (meaning you can't withdraw donations if you change your mind or need extra cash), the donor retains an advisory role and can recommend how to invest the assets and how much to contribute to various charities over time.
In this article, I'll dig into how Vanguard Charitable Endowment Program stacks up in terms of its underlying investment options, as well as the administrative fees and account minimums.
Vanguard’s donor-advised fund caters to a more elite group of charitable donors than its peers. While Fidelity Investments Charitable Gift Fund and Schwab Charitable Fund don’t currently require a minimum dollar amount to set up a new account or make additional contributions, Vanguard requires a $25,000 minimum for new accounts and $5,000 for additional investments. Donors are also required to maintain a $25,000 account balance; accounts open for more than six months that drop below that value are subject to a $250 account maintenance fee. Vanguard Charitable officials believe these higher minimums lead to more committed donors who can make a greater charitable impact with their donations over time.
Like nearly all donor-advised funds, Vanguard’s donor-advised fund also comes with an additional layer of administrative costs. For lower balances, Vanguard’s fee structure is identical to those of Schwab and Fidelity. The fund charges a 0.60% annual administrative fee (or a flat fee of $100, whichever is greater) for accounts with balances up to $500,000, and 0.3% for the next $500,000 in assets.
These charges are in addition to the fees on the underlying investments (operating expenses for mutual funds and exchange-traded funds, or trading commissions for individual stocks and bonds). All of these fees come out of the amount donated, making donor-advised funds less cost-efficient than donating directly to a charity.
That said, Vanguard Charitable’s fee structure steps down at a pretty generous rate, making it a more compelling option for donors who plan to maintain account balances of $1 million or more. Tiered fees on account balances between $1 million and $15 million are 13 basis points, which drops down to 10 basis points for the next $15 million in assets and 5 basis points for assets between $30 million and $100 million.
Vanguard Charitable offers two main investment types: diversified asset-allocation pools with a range of risk levels (which it calls Portfolio Solutions) and single-asset pools for a variety of asset classes (which it calls Portfolio Building Blocks). In contrast to Fidelity and Schwab, Vanguard’s lineup consists almost exclusively of in-house funds, although the quality of the menu is tough to quibble with.
The asset-allocation pools offer a diversified mix of equities and fixed-income securities, with risk levels ranging from conservative to more aggressive. Each of the four pools invests in three underlying funds to meet a target equity allocation of 20%, 40%, 60%, or 80%. Three of the four are ultrasimple combinations of index funds focusing on U.S. stocks, international stocks, and bonds. The Moderate Growth Portfolio Solution is the only one that dips its toe into actively managed funds, combining equal weightings in actively managed stalwart Vanguard Wellington (VWELX) with a plain-vanilla balanced index plus a smaller stake in international stocks.
For investors who prefer to build their own portfolios, Vanguard Charitable offers a variety of mostly passive vehicles covering domestic stocks, international stocks, bonds, and cash. It’s a comprehensive list that includes most major asset classes investors could possibly need, with the potential exception of an inflation-protected bond offering, which could fill a useful role. The lineup also includes environmental, social, and governance-focused offerings for both domestic and international stocks.
Finally, donors with higher account balances (ongoing account balances of $100,000 or more) can invest in TIFF Multi-Asset Fund, an actively managed fund managed by The Investment Fund for Foundations. The fund aims to generate annual returns of at least 5 percentage points above inflation.
The fund is geared toward donors who are pursuing long-term giving strategies, similar to endowments and foundations. The fund allocates about 65% to domestic and global stocks, 15% to fixed income, and 20% to diversifying strategies, such as REITs, commodities, and hedge funds. Although TIFF Multi-Asset Fund usually has a $2.5 million minimum for initial investments, its expenses are quite a bit higher than Vanguard-managed offerings. The pool carries an expense ratio of 1.61% and is also subject to an additional fee of 0.35% for entry and exit. (Fees for entry and exit are being waived until the end of 2021.)
For charitable donors who can pony up the $25,000 minimum, Vanguard Charitable Endowment offers a compelling lineup of top-quality investment offerings, as well as lower administrative costs than most competing donor-advised funds.
Amy C. Arnott has a position in the following securities mentioned above: VINIX, VBTIX. Find out about Morningstar’s editorial policies.