S&P 500 ETF giant Vanguard just slashed fees on 87 of its funds — the largest fee cut in its 50-year history. And that means $350 million in potential savings for investors is up for grabs just this year.
Starting this month, Vanguard lowered the annual expense ratios on nearly 170 share classes including some mutual funds and ETFs. And given that fees have a huge influence on long-term returns, these cuts stand to save investors roughly a billion dollars in just the next three years. "The impact to existing shareholders is larger than before as there is more money invested in these ETFs than before," said Todd Rosenbluth, director of research at TMX Vetta Fi.
Vanguard has now lowered its annual expenses on its funds more than 2,000 times, said Vanguard CEO Salim Ramji in a statement.
"(Vanguard Founder Jack) Bogle had a great phrase, 'You get what you don't pay for,' " Ramji said. But how can ETF investors take advantage of these new fee cuts?
Mind The Fees
When looking to put fresh cash to work, you'll definitely want to check out the Vanguard ETFs first. Vanguard took down fees on some of its most popular funds.
Take $143 billion-in-assets FTSE Developed Market ETF as an example. The fee on the fund is now 0.03%, cut in half from the previous fee of 0.06%. This makes an already inexpensive way to invest in key companies in developed nations even cheaper.
Invest $100,000 in the fund and you'll only pay $30 as a fee in the first year, down from $60. And it's also a savings from rival ETFs. The $125 billion-in-assets iShares Core MSCI EAFE ETF charges 0.07% annually. That will cost you $70 in the first year on a $100,000 investment.
Do The Math
If you already own the competing and higher-priced ETF, your next move is more complicated.
First, check if you have an unrealized gain or loss on the costlier ETF. If you have a loss on the position, selling and switching to the lower cost Vanguard fund might make sense. You can use losses on positions you've held for more than a year after you sell to offset realized gains on positions held more than a year. Up to $3,000 of unused losses can also reduce your taxable income each year. Just know you must wait more than 30 days after selling until buying the cheaper ETF if they're equivalent.
The decision is tougher if you're sitting on a paper gain on the costlier ETF. You must calculate how much money you'll save on fees. It's then a judgment call if that savings warrants triggering a taxable event on selling. "If (you) own a competing ETF than the Vanguard products, (you) should decide if the fee savings is enough to warrant selling and having to pay capital gains if in a taxable account," Rosenbluth said.
Know What You're Buying
Saving money on ETF fees is great. But it's not the only consideration. Some costlier ETFs might be worthwhile if they work better in your portfolio, Rosenbluth says.
Vanguard's VEA, for instance, owns Canadian and South Korean stocks that are not found in iShares' IEFA, he says. "So the performances of IEFA and VEA will be different due to the exposure more than fee savings," Rosenbluth said. "Do you want to have Canada in your developed international equity ETF or not?"
Biggest Vanguard ETFs To Get Fee Cuts
| ETF | Symbol | Prior expense ratio | New expense ratio | Assets ($ billions) |
|---|---|---|---|---|
| Vanguard FTSE Developed Markets | VEA | 0.06% | 0.03% | 142.6 |
| Vanguard Dividend Appreciation | VIG | 0.06% | 0.05% | 90.3 |
| Vanguard Information Technology | VGT | 0.10% | 0.09% | 87.1 |
| Vanguard FTSE Emerging Markets | VWO | 0.08% | 0.07% | 81.1 |
| Vanguard Total International Stock | VXUS | 0.08% | 0.05% | 79 |
