Fidelity may have won the race to zero, but the fee war isn't over.
Vanguard said on Monday that effective immediately, it has lowered the minimum investment requirement for its cheapest share class, Admiral, on 38 of its index mutual funds to $3,000 from $10,000.
The Valley Forge, Pennsylvania-based asset manager has closed the more expensive Investor share classes of those index funds to new investors and expects to roll over all existing money in Investor shares of the funds to Admiral shares by April of 2019.
In many cases, the conversion of Investor shares to Admiral shares could represent a significant fee cut for Vanguard investors. For example, Vanguard’s $431.2 billion Vanguard 500 Index fund, which is affected by the announcement, carries a 0.14% net expense ratio for its Investor share class and a 0.04% net expense ratio for its Admiral share class.
The announcement follows rival Fidelity Investments' move to escalate the fee wars in August when it rolled out a line of zero-management fee index mutual funds, which brought in around $1 billion in assets in their first month of existence.
Fidelity also lowered expense ratios on a host of its index funds and eliminated investment minimums on all of its active and passive mutual funds.
Commentators were quick to point out that the move was a reaction to Fidelity.
Vanguard reduces investment minimum for Admiral share class of 38 index funds to $3,000. A big move, but still a far cry from Schwab and Fidelity’s recent zeroing out of investment minimums. https://t.co/3zS9s5lDKG— Ben Johnson, CFA (@MstarETFUS) November 19, 2018
Vanguard lowering inv minimum of index fund admiral shareclasses to $3k and will eventually merge the investor shareclass into the admiral shareclass. This will amount to meaningful fee reduction and is effectively a response to Fidelity Zero. https://t.co/hY8rRQMhDt— Jeffrey Ptak (@syouth1) November 19, 2018
Vanguard estimated the lowered investment minimums for the Admiral share classes across the 38 funds, would save investors a combined $71 million and that the Admiral share classes represented a discount of between 15% and 71% on the existing investor share classes of the funds.
‘No other firm in the industry has demonstrated Vanguard’s track record of delivering cost savings and value to its clients,’ Vanguard chief executive Tim Buckley said in a statement.
'I think because of their scale, they may not be the first to make a decision but they can be a fast follower with decisions and it has a significant impact for investors,' said CFRA director of ETF and mutual fund research Todd Rosenbluth. 'I do think their size has helped. Their size allows them to reach more shareholders than an upstart that's coming in and offering low-cost products.'
Rolling Investor shares into Admiral shares could have bigger implications in terms of management fees, according to one analyst.
Vanguard’s 51 index funds with Admiral share classes collectively have $369 billion in their Investor share classes, estimated Jeff DeMaso, the director of research for $5 billion RIA Adviser Investments and co-editor of the Independent Adviser for Vanguard Investors newsletter.
If the firm converted the Investor share classes for all of those funds into their Admiral siblings, Vanguard would be giving up around $300 million in management fees out of the $572 million in fees the funds currently generate across all share classes.
The firm maintains Admiral share classes for 94 funds across all asset classes. If it rolled the estimated $514 billion in Investor shares into their Admiral siblings, Vanguard would surrender around $431 million in annual management fees, estimated DeMaso.
‘Rather than look at this as a “cost” or “lost fees,” flip the story around,’ DeMaso wrote. ‘By converting everyone to the Admiral cost structure, Vanguard could save investors $431 million next year alone. That’s a pretty good story, and one that would cement Vanguard’s reputation as a low-cost leader.’
Vanguard currently brings in around $995 million in management fees on the Investor share classes for those funds.
For now, however, the move affects 38 funds, plus five new funds, which previously did not have Admiral share classes. These funds are the Vanguard FTSE Social Index fund, the Vanguard FTSE All-World ex-US Small Cap Index fund, the Vanguard High Dividend Yield Index fund, the Vanguard Long-Term Bond Index fund and the Vanguard Total World Stock Index fund.
Vanguard estimated the new share classes would save investors in those funds around $10 million.
'I don't think we're going to see market share shifts as a result of this but I do think as investors are increasingly choosing between active and passive and seeing lower fee ETFs but not feeling comfortable with the ETF wrapper, this is going to increasingly encourage investors to look towards index mutual funds,' Rosenbluth said.