Vanguard Reports Lower Expense Ratios Resulting In Nearly $75 Million In Savings For Clients

VALLEY FORGE, Pa., Jan. 28, 2016 /PRNewswire/ -- Vanguard clients saved a total of nearly $75 million as a result of lower expense ratios reported today for 35 individual mutual fund shares, including 12 Vanguard target-date funds.¹ Last month, the firm reported lower expense ratios for 53 fund shares.

"We strongly believe in setting our investors up for success, and one of the best ways to do that is to keep the cost of investing low, enabling them to keep more of what they earn," said Vanguard CEO Bill McNabb. "The compounding effect of high costs is especially corrosive to the returns of retirement investors—those saving over 30 to 40 years in a 401(k) plan or through an IRA. As a result, low costs, along with high savings rates, are critical to the retirement readiness of millions of Americans."

Target-date fund's popularity grows
The $22.7 billion Vanguard Target Retirement 2035 Fund reported an expense ratio reduction of 3 basis points, while the remainder of the series of 12 Vanguard Target-Retirement Funds reported reductions of 2 basis points. The expense ratios now range from 0.14% to 0.16%, which are among the lowest available to individual investors seeking a target-date option². In June 2015, Vanguard launched a separate series of 12 institutional target-date funds differentiated by lower costs (0.10%) and higher minimum investment requirements ($100 million).

Vanguard has seen broad adoption of target-date strategies, particularly among company retirement plan sponsors and participants. Some 88% of plan sponsors offered target-date funds at the end of 2014 (up 17% compared with year-end 2009), and 64% of all participants use target-date funds (Source: How America Saves 2015).

Vanguard is now the largest manager of target-date fund assets in the industry, as investors have gravitated to the company's low-cost, index-based approach.³ Vanguard manages nearly $358 billion of target-date assets and experienced more than $56 billion cash flow into its target date mutual funds and collective trusts in 2015. According to Morningstar, Vanguard led the category in target-date mutual fund flows with nearly $37 billion in 2015, bringing the firm's total target-date mutual fund assets to $225 billion.

Four other fund categories report reductions
In addition to the Vanguard Target Retirement Funds, Vanguard reported expense ratio reductions for a range of fund share classes (Investor, Admiral, ETF, Institutional, and Institutional Plus) for the 12 months ended September 2015, in four other fund categories, as summarized below:

• Actively managed balanced. Two actively managed balanced fund shares reported lower expense ratios. The $41.2 billion Vanguard Wellesley Income Fund reported expense ratio reductions on Investor Shares of 2 basis points to 0.23% and on Admiral Shares of 2 basis points to 0.16%.
• Fundamentally managed active equity. Eight fundamentally managed active equity fund shares reported lower expense ratios. The largest of these funds, the $46 billion Vanguard PRIMECAP Fund, reported reductions on Investor Shares of 4 basis points to 0.40% and on Admiral Shares of 1 basis point to 0.34%.
• Quantitatively managed active equity. Nine quantitatively managed active equity fund shares—seven managed by Vanguard's Quantitative Equity Group—reported lower expense ratios. The largest of these, the $6 billion Vanguard Strategic Equity Fund, reported that its expense ratio fell six basis points to 0.21%.
• Bond index. Four bond index fund shares reported lower expense ratios. The $13.1 billion Vanguard Short-Term Inflation-Protected Securities Index Fund reported the following reductions: Investor Shares, 3 basis points to 0.17%; Admiral Shares, 2 basis points to 0.08%; ETF Shares, 2 basis points to 0.08%; and Institutional Shares, 2 basis points to 0.05%.

The accompanying fact sheet provides a complete list of the fund and ETF shares reporting expense ratio changes for the fiscal year ended September 2015. Any additional 2015 fiscal-year expense ratio changes will be reported in 2016 as fund prospectuses are published. Expense ratios are reported on an annual basis and represent actual operating expenses for the prior fiscal year.

During the 2015 calendar year, Vanguard reported expense ratio reductions for 102 individual mutual fund shares, of which 28 were ETF shares. In calendar year 2014, Vanguard reported lower expense ratios for 90 individual mutual fund shares, including 31 ETF shares.

Incentive payment results in expense ratio increase
Admiral Shares of the $11.9 billion Vanguard Morgan Growth Fund and the $1 billion Vanguard Capital Value Fund reported increases of 1 basis point to 0.27% and 3 basis points to 0.50%, respectively, for fiscal year 2015. In this instance, the changes are largely the result of an incentive fee paid to the fund's advisors.

Vanguard aligns the interests of its external investment advisory firms with those of shareholders by using incentive/penalty arrangements. Under the majority of Vanguard fund advisory agreements, an external advisor's base advisory fee can be adjusted up or down to reflect the fund's investment performance relative to the total return of an appropriate market benchmark over a 36- or 60-month period. In effect, the advisor is rewarded for outperforming a market benchmark and penalized for underperforming it. Vanguard is one of the few firms in the industry to employ performance incentive/penalty arrangements.

Continued growth fuels expense reductions
Vanguard's expense ratio reductions are in part a result of the continued growth of the funds via market appreciation, as well as strong cash inflows.

Vanguard's U.S. domiciled mutual funds and ETFs experienced $236 billion in cash flow for 2015, an industry record, eclipsing the previous industry record ($214.5 billion) set by the firm in 2014⁴.

In 1975, when Vanguard managed $1.8 billion in U.S. fund assets, the average expense ratio for its funds was 0.89%. Today, Vanguard manages $3.2 trillion in U.S. fund assets. The average expense ratio of the firm's funds was 0.18%, as of the end of 2014, the most recent data available. (On an asset-weighted basis, the average expense ratio was even lower, at 0.14%.)

In 2004, when Vanguard managed $6 billion in ETF assets, the average expense ratio for its ETFs was 0.22%. Today, Vanguard manages $483.2 billion in U.S. ETF assets. The average expense ratio of the firm's ETFs was 0.12% at the end of 2015. (On an asset-weighted basis, the average expense ratio was even lower, at 0.10%.) ⁵

About Vanguard
Vanguard is one of the world's largest investment management companies. As of December 31, 2015, Vanguard managed more than $3.4 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers more than 300 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.

¹Vanguard calculation based on average fund assets over a 12-month period and the change in expense ratios through fiscal year September 2015.
² Source: Vanguard, Morningstar
³Source: Pensions & Investments, October 5, 2015
⁴ Source: Vanguard, Bloomberg
⁵Source: Vanguard

All asset figures are as of December 31, 2015, unless otherwise stated.

For more information about Vanguard funds and ETFs, visit vanguard.com or call 800-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Past performance is no guarantee of future results. Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.

All investments are subject to risk, including the possible loss of the money you invest.

U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623.

Vanguard Marketing Corporation, Distributor.

Vanguard fund and ETF shares reporting expense ratio changes for the fiscal year ended September 2015.

Actively managed balanced

Fundamentally managed active equity

Quantitatively managed active equity

Bond index

Target Retirement Funds

Source: Vanguard

* All expense ratios are as of the most recent prospectus. Generally, expense ratios are backward-looking, meaning they are based on actual operating expenses reported from the prior fiscal year.

For more information about Vanguard funds and ETFs, visit vanguard.com or call 800-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All investments are subject to risk, including the possible loss of the money you invest.

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.

U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623.

Vanguard Marketing Corporation, Distributor.

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