I need an explanation of ownership of Vanguard Group

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optimus
Posts: 20
Joined: Mon Jan 21, 2008 11:32 pm

I need an explanation of ownership of Vanguard Group

Post by optimus »

I don't quite understand Vanguard's client owned structure. I read this page but I'm still not sure how it is setup:
https://about.vanguard.com/what-sets-va ... p-matters/

Does every fund own some percentage of Vanguard? How are Vanguard's profits returned to the fund?
talzara
Posts: 4745
Joined: Thu Feb 12, 2009 6:40 pm

Re: I need an explanation of ownership of Vanguard Group

Post by talzara »

It is more of a figurative statement. The lower expense ratio can be thought of as getting to reinvest the profits that would otherwise have gone to an owner. But Vanguard operates at breakeven, and thus there is no actual profit to return to the individual funds. If you look at the annual report for each fund, you will notice that Vanguard appears only under Expenses, not Income.

The mechanism is that each fund holds a percentage of the capital stock of the Vanguard Group, Inc. In turn, the Vanguard Group owns 100% of Vanguard Marketing Corporation, which then charges a fee to each fund to cover its fair share of costs. Because revenues = expenses, Vanguard itself will make no profit.

The actual fees paid by each fund to VMC are calculated as follows:
To ensure that each fund’s participation in the joint arrangement falls within a reasonable range of fairness, each fund contributes to VMC’s marketing and distribution expenses in accordance with an SEC-approved formula. Under that formula, one half of the marketing and distribution expenses are allocated among the funds based upon their relative net assets. The remaining half of those expenses is allocated among the funds based upon each fund’s sales for the preceding 24 months relative to the total sales of the funds as a group; provided, however, that no fund’s aggregate quarterly rate of contribution for marketing and distribution expenses shall exceed 125% of the average marketing and distribution expense rate for Vanguard, and that no fund shall incur annual marketing and distribution expenses in excess of 0.20% of its average month-end net assets.

http://www.vanguard.com/pub/Pdf/sai634.pdf
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