Are Vanguard Mutual Funds Getting Expensive?

Early this year, I compared performance of actively managed funds in my portfolio against some Vanguard index funds. In addition to the fund returns in 2008, which are all quite different between the two group of funds (four out ten funds beat Vanguard while the other six lagged), another thing I noticed from the comparison is that the costs of those Vanguard funds kept going down last year, despite the overall poor performance across the board. That, however, apparently doesn’t represent the whole picture of what happened to Vanguard index and actively managed funds as they, like other fund offerings from other fund families, also suffered from miserable returns and outflows.

Last week, an article on Morningstar.com says the fund company which has been known for its rock-bottom pricing is increasing expense ratios on many of it offerings this year. Accord to the article,

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.

And the increase in fees isn’t really small percentage wise even though Vanguard still beats its peers as far as the cost of owning a mutual fund is concerned. For example, Morningstar found that following five Vanguard municipal bond funds have increased their expense ratios (ERs) by a third this year, from 0.15% to 0.20%:

  • Vanguard High-Yield Tax-Exempt (VWAHX)
  • Vanguard Intermediate-Term Tax-Exempt (VWITX)
  • Vanguard Long-Term Tax-Exempt (VWLTX)
  • Vanguard Short-Term Tax-Exempt (VWSTX)
  • Vanguard Limited-Term Tax-Exempt (VMLTX)

Remember these are only a quarter of Vanguard’s total fund offerings. For those funds that haven’t issued their prospectuses, it’s not clear yet what will happen to their ERs, but it’s likely they will increase¬† as well. And if Vanguard is increasing its funds’ costs, you know the same thing will happen to funds from other families, especially those actively managed funds.

That’s like adding salt to the wound, isn’t it?

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9 Responses to “Are Vanguard Mutual Funds Getting Expensive?”

  1. Nick L |  Mar 30, 2009 at 12:23 pm

    Why would you invest in mutual funds with any costs? When there are ETFs extremely similar.

  2. Sun |  Mar 31, 2009 at 8:54 am

    @Nick Mutual funds are still valid options for investors who dollar-cost averaging in their retirement accounts. If you have to pay $7 commission to buy $100 worth of ETF every month, then that’s not worth it.