Vanguard Expense Ratios Increase

Hell has frozen over, or at least gotten a little chilly. Vanguard has increased expense ratios on many of its funds.

The family long renowned for the rock-bottom expense ratios of its index and actively managed funds couldn't escape the tortuous market of the past 18 months. Although, as a firm, Vanguard has been one of the few families to consistently attract new money and avoid layoffs throughout the turmoil, market depreciation has taken a toll on assets under management in many of its funds. Some individual funds also have seen outflows. Total assets under management have dropped from $1.3 trillion at the end of 2007 to a little less than $1 trillion as of Feb. 29, 2009. The more than $300 billion contraction caused the firm to cut costs by, among other things, slashing its 2008 employee bonus pool in half and being more selective about hiring. More pertinent to fund owners, it also has caused expense ratios of many funds to increase.

To Vanguard's credit, it has chosen to disclose the higher expense ratios in the 2009 prospectuses that have been rolling out this year. Annual reports, and often prospectuses, are backward-looking, listing the fees levied in the previous fiscal year. This year Vanguard decided to print in its prospectuses the expenses "being deducted from current fund assets," according to recent prospectuses, to give investors a heads-up.

So far this year, prospectuses for more than 30 of the family's roughly 110 distinct funds have been filed with the Securities and Exchange Commission and the expense ratios of 29 of the investor share classes of those funds have gone up. The sizes of the increases vary from fund to fund and depending on whether you compare the fees in the current prospectuses with those in the previous ones or with the charges disclosed in the funds' annual reports. Morningstar has long given priority to the audited expense ratios of the annual reports, so that's what I use for the following comparisons.

On average the expense ratios of Vanguard funds that have issued new prospectuses so far this year have gone up an average of 6.0 basis points, or hundredths of a percent, according to Morningstar data.

Five Vanguard municipal-bond funds have seen the biggest percentage increases. The fees of  Vanguard High-Yield Tax-Exempt  (VWAHX),  Vanguard Intermediate-Term Tax-Exempt  (VWITX),  Vanguard Long-Term Tax-Exempt  (VWLTX),  Vanguard Short-Term Tax-Exempt (VWSTX), and  Vanguard Limited-Term Tax-Exempt (VMLTX) all went up by a third from 0.15% to 0.20%. That's higher than they have been in nearly a decade.

 Vanguard U.S. Value  has seen the biggest absolute increase so far. Its expense ratio went up 9 basis points from 0.37% to 0.46%, or an increase of about 24%.  Vanguard Total World Stock Index  had the smallest increase so far in both absolute and percentage terms, rising 4 basis points, or about 9%, to 0.50%. The fund already was one of Vanguard's more expensive index funds because it's less than a year old and still has a small asset base.

The expense ratios of two funds went down or stayed the same.  Vanguard Growth Equity's  levy dropped by 12 basis points, or nearly 17%, to 0.60%, and  Vanguard GNMA (VFIIX) remained flat at 0.21%. Growth Equity got two new managers in the past year. Vanguard added Baillie Gifford as a subadvisor to the fund in 2008 and then replaced Turner Investment Partners, which had managed the fund since inception, with Jennison Associates earlier this year. The difference in management fees likely contributed to the decline.

The exchange-traded and admiral share classes of these funds have seen similar increases. I don't know whether the expenses of funds that have not issued new prospectuses yet, notably Vanguard's domestic stock and bond index funds, will increase. But it's a good bet they will.

Virtually all of the new expense ratios disclosed so far remain lower than the vast majority of their respective peers'. And the long-term fee trend at Vanguard has been downward. It's more than likely that Vanguard's expense ratios will resume that trajectory when the markets recover because declining asset levels accounted for most of the increases. Like a tax increase in a recession, the higher fees sting. But even with the recent hikes, Vanguard hasn't surrendered its title as a low cost leader among traditional open-end mutual funds. 

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