Vanguard Emerging Markets Stock Index

[smooch]

I am in the process of moving funds to Vanguard. I see that Emerging Markets Stock Index (VEIEX) has a .5% Purchase fee and Redemption fee. The fee information on the Vanguard site says "The fee is paid directly to the fund and is not a load".

Why is that not considered a load and is it worth paying these fees to be in this fund? Thanks!

 

[Spanky]

A load is paid to a broker.

 

[fire5soon]

You can also purchase the Emerging Markets ETF (VWO I believe) without the 0.5% purchase fee, but you will pay a brokerage commission.

 

[justin]

The Emerging Markets Index fund is my next purchase to build my diversified index fund portfolio. I plan on paying the 0.5% fee. It is a one-time fee, and amounts to $50 on a $10,000 purchase. I also plan on holding this fund forever, so the $50 amortized over the life of the holding period is a very low annual cost. You can go with the ETF to save a few bucks in fees, but if you want to add a small amount or sell a small amount in the future, you're going to pay a full commission instead of 0.5%. Cost-wise, it isn't a big deal either way if you are buy and hold, unless you are talking about putting a large amount of money into the Em mkts fund. In that case, paying a one-time commission may be the best option. I believe the expense ratios are lower for the ETF version of the Em mkts fund too.

 

[mickeyd]

As I understand it, this fee, and some other Vanguard fees, are rolled into the fund's NAV so that all of the other investors in the fund get a chunk of it on a pro-rata basis. I think that the idea is that if you bail out of the fund it may adversely affect the others in the fund.

Another way to acquire the EM fund is to invest in the Total International Stock Index Fund (VGTSX). This is a fund-of-funds. It has a 2% redemption fee but it hangs around for only 2 months, at which time it is zero. This fund has about 12% in EM, 62% Euro and 26% Pac.

 

[justin]

Another way to acquire the EM fund is to invest in the Total International Stock Index Fund (VGTSX). This is a fund-of-funds. It has a 2% redemption fee but it hangs around for only 2 months, at which time it is zero. This fund has about 12% in EM, 62% Euro and 26% Pac.

I'm using this strategy to get a portion of my Emerging markets fund without paying the .5% sales fee.

 

[lazyday]

You can also purchase the Emerging Markets ETF (VWO I believe) without the 0.5% purchase fee, but you will pay a brokerage commission.

You may also pay a premium. For example, as I write this, the most recent premium was over 1%: http://flagship4.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0964&FundIntExt=INT
(NAV 60.40, but price 61.04; .64 is over 1% of 60.40.)

If you were to buy when everyone else is panic selling, you probably could buy without much of a premium, or perhaps at a discount.

 

[justin]

You may also pay a premium. For example, as I write this, the most recent premium was over 1%: http://flagship4.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0964&FundIntExt=INT
(NAV 60.40, but price 61.04; .64 is over 1% of 60.40.)

If you were to buy when everyone else is panic selling, you probably could buy without much of a premium, or perhaps at a discount.

Wow. Thanks for bringing that up. I just checked the Vanguard page that shows how the fund usually trades relative to its NAV. 80% of the time, VWO trades over its NAV. And 9% of the time, it trades a full 100 basis points or more above its NAV. Scary stuff - enough to make me purchase the mutual fund non-ETF variety for sure.

http://tinyurl.com/7qg99

(edited to make link smaller and work correctly I hope)

 

[lazyday]

If making a big enough purchase, perhaps a good strategy is to buy VEIEX, and then have Vanguard convert the shares to VWO for you. You may need to pay Vanguard $50 for the conversion.

 

[smooch]

Thank you all for the replies. Using the Index fund for the EM exposure is a good idea.

 

[Spanky]

If VMO is fairly valued (no premium or discount), VMO is better than VEIEX for large purchases. For a $100,000 investment, VMO will cost $35 while VEIEX will cost $500.

 

[justin]

If VMO is fairly valued (no premium or discount), VMO is better than VEIEX for large purchases. For a $100,000 investment, VMO will cost $35 while VEIEX will cost $500.

True. But that is a big chunk of change for a one-time purchase. I'd assume somebody with a $1,000,000 portfolio or so might make that kind of purchase. If it were me, I'd DCA into the fund over 12 months or so, given the recent run-up (although the P/E's and projected growth figures are great relative to the rest of the market).

After adding in the commissions, bid-ask spread and premium to NAV (or the potential), I'd stick with the VEIEX unless you are buying a very large amount of Em Mkts.

 

[JB]

I already own the Total International Index and the Emerging Markets Index and was wondering the 'fee'. After some thought I expect the Emerging Markets fund to slightly outperform the ETF because of the 'fees' which are added back into the fund. Unfortunately, the ETF hasn't been around long enough to compare. I think that the rules on cap gains distributions for mutual funds and ETFs are different (favoring ETFs). This may make a 1-1 comparison difficult.

 

[justin]

I think that the rules on cap gains distributions for mutual funds and ETFs are different (favoring ETFs). This may make a 1-1 comparison difficult.

I've heard that too. Can anyone explain what the differences are between the way CG's are distributed for an ETF vs. a regular fund?

 

[Spanky]

I've heard that too. Can anyone explain what the differences are between the way CG's are distributed for an ETF vs. a regular fund?

Excerpts from http://finance.yahoo.com/etf/education/06:

How is it ETFs are so efficient? Through a regulatory loophole, ETFs are considered to be created by trading equivalent certificates (the ETF for the many stocks that make up the basket) in what is called an in-kind trade. This exchange of essentially identical items does not trigger capital gains, according to the IRS. Traditional mutual funds must go into the open market and exchange cash for stocks and vice versa, which trigger realization of gains. It's a subtle difference, admittedly, but which results in an advantage for the ETF investor.

 

[lazyday]

Lots more here: http://www.altruistfa.com/readingroomarticles.htm#ETFs

 

[justin]

What I get from the Yahoo Finance article is that ETF's pay out much lower capital gains distributions than their counterpart index funds. That is a significant tax advantage, if you are invested in a fund with high CG distributions and you hold it in your taxable account.