Skip to Content
Investing Specialists

Putting One Vanguard Expense Ratio Increase Under the Microscope

What's behind the recent fee hike at Vanguard Wellington?


Earlier this year I noted the expense ratios of most of Vanguard's funds had edged uncharacteristically higher this year largely due to slumping assets. More details have come out in individual fund shareholder reports since then. I recently took a look at one of the family's largest and oldest funds,  Vanguard Wellington (VWELX) to see if there were other factors besides asset depletion behind the increases.

Wellington's estimated annualized expenses for this year have increased to 0.37% from 0.29% in 2008 for the investor share class and to 0.23% in 2009 from 0.18% in 2008 for the fund's admiral share class. That's still among the lowest levies in the moderate- allocation category, but a 27% increase is a shock coming from the bastion of cheap investing.

In his letter to shareholders in Wellington fund's recent semiannual report, Vanguard president and CEO William McNabb first blames declining assets for the fund's expense increase. The math is simple: As assets fall, the fund's fixed expenses eat up a larger percentage of its assets. McNabb also notes Vanguard's contracts with subadvisors like Wellington Management often include breakpoints, or asset levels at which subadvisory fees tick down a notch or so. As assets increase, breakpoints work for you as the lower rates are applied to a bigger share of the kitty, lowering the overall expense ratio. When the kitty shrinks, however, less of the fund is eligible for the reduced fees, so expenses can go up. This happened at the Wellington fund, too, but it didn't have a major impact on overall fee levels. Overall, Wellington Management had a basic management fee of 0.07% for the six months ended May 31, 2009, which was up from 0.06% for the year ended Nov. 30, 2008, according its semiannual and annual reports.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.