Do I have to read the prospectus before buying an index fund?

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ebaron
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Re: Do I have to read the prospectus before buying an index fund?

Post by ebaron »

afan wrote: Tue May 04, 2021 9:12 am
ebaron wrote: Mon Oct 12, 2020 10:58 am
livesoft wrote: Mon Oct 12, 2020 10:53 am
ebaron wrote: Mon Oct 12, 2020 10:27 am Do Bogleheads do it?
No, they do not. I last read a prospectus in the 1980s I think. You should read at least 3 to 10 prospectuses in your lifetime. It won't kill you. But after 10 of them, you might only read the ones of unusual non-mainstream investments.
Doesn't this expose you to the risk of buying something that you would not otherwise buy if you had read the prospectus?
There was a thread by a poster who was outraged that their fund had been doing exactly what the prospectus said it would do, rather than what the poster assumed it would be doing. Based on nothing other than the name of the fund. The complainant was vehement in their expressed opinion that funds should do what they assumed they would do and they should not read a prospectus.

It was both sad and funny.
Do you have the link to that thread?
Northern Flicker
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

TomatoTomahto wrote: Tue May 04, 2021 6:31 am Wow. Do you prospectus readers also read End User License Agreements (EULA)? If you say yes, I’m not sure I believe you. But, if you truly do, I’m impressed on both counts.

FWIW, I don’t read prospectus or EULAs. I am not worried that my not reading Vanguard’s Prospectus for Total Stock will keep me ignorant of some dastardly actions of theirs. I have seen evidence (Cambridge Analytica) that Facebook, regardless of what their EULA says, does dastardly things with data. I have long ago deleted my Facebook account and wish that I’d never opened one.
Had you read the EULA before you created a Facebook account you may not have created it.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Northern Flicker
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

MAKsdad wrote: Tue May 04, 2021 9:24 am If I wanted to spend time thinking about my investments, I would spend it investing in individual stocks rather than reading a prospectus for an index fund. The whole point (for me) of index funds is that I don't have to think about it at all.
The time to read a prospectus, skipping or skimming some sections before investing is miniscule in comparison to the time required to manage a portfolio of stocks with the funds, and it is unlikely you would avoid taking uncompensated risk if you tried to manage it yourself.
Last edited by Northern Flicker on Tue May 04, 2021 4:49 pm, edited 1 time in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
H-Town
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Re: Do I have to read the prospectus before buying an index fund?

Post by H-Town »

sureshoe wrote: Tue May 04, 2021 9:17 am Let me give you this point of view.

We have a fixed number of days, hours, minutes in our life. We have to invest this just like our money.

If you want to spend your time reading a prospectus in detail, I would ask - what do you think you're going to get out of it? If you want enjoyment and to start learning more about mutual funds, then that's fine - reading the prospectus is entertainment and some education.

I wouldn't try to convince yourself that reading a prospectus will lead you to better investments in most situations. Your time is probably better spent elsewhere, because to get to a point where you're actually making informed, educated decisions based on a prospectus is a matter of thousands of hours of education (and even then, the jury is out on whether this is possible).

Don't hear this as "just invest blindly". Do hear this as "there are more efficient ways to get the same information as what is in the prospectus".
I’m sure there are people wasting their lives away laying on a couch, gossiping, or posting on social media. Some may even argue that posting on forum like this site is a waste of time, which I can’t disagree with.

So I’d stop short at judging how one should spend their time. Just do you and you only.
sureshoe
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Re: Do I have to read the prospectus before buying an index fund?

Post by sureshoe »

H-Town wrote: Tue May 04, 2021 12:49 pm
sureshoe wrote: Tue May 04, 2021 9:17 am Let me give you this point of view.

We have a fixed number of days, hours, minutes in our life. We have to invest this just like our money.

If you want to spend your time reading a prospectus in detail, I would ask - what do you think you're going to get out of it? If you want enjoyment and to start learning more about mutual funds, then that's fine - reading the prospectus is entertainment and some education.

I wouldn't try to convince yourself that reading a prospectus will lead you to better investments in most situations. Your time is probably better spent elsewhere, because to get to a point where you're actually making informed, educated decisions based on a prospectus is a matter of thousands of hours of education (and even then, the jury is out on whether this is possible).

Don't hear this as "just invest blindly". Do hear this as "there are more efficient ways to get the same information as what is in the prospectus".
I’m sure there are people wasting their lives away laying on a couch, gossiping, or posting on social media. Some may even argue that posting on forum like this site is a waste of time, which I can’t disagree with.

So I’d stop short at judging how one should spend their time. Just do you and you only.
So I'm curious, where am I judging? The OP literally asked "do I have to read the prospectus" and I said they can spend their time better elsewhere if improving investing results is their goal. I LITERALLY advised the poster to do what works for them.

I mean, you're the one throwing around the phrase: "wasting their lives away", that is a judgmental statement.
H-Town
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Re: Do I have to read the prospectus before buying an index fund?

Post by H-Town »

sureshoe wrote: Tue May 04, 2021 1:10 pm
H-Town wrote: Tue May 04, 2021 12:49 pm
sureshoe wrote: Tue May 04, 2021 9:17 am Let me give you this point of view.

We have a fixed number of days, hours, minutes in our life. We have to invest this just like our money.

If you want to spend your time reading a prospectus in detail, I would ask - what do you think you're going to get out of it? If you want enjoyment and to start learning more about mutual funds, then that's fine - reading the prospectus is entertainment and some education.

I wouldn't try to convince yourself that reading a prospectus will lead you to better investments in most situations. Your time is probably better spent elsewhere, because to get to a point where you're actually making informed, educated decisions based on a prospectus is a matter of thousands of hours of education (and even then, the jury is out on whether this is possible).

Don't hear this as "just invest blindly". Do hear this as "there are more efficient ways to get the same information as what is in the prospectus".
I’m sure there are people wasting their lives away laying on a couch, gossiping, or posting on social media. Some may even argue that posting on forum like this site is a waste of time, which I can’t disagree with.

So I’d stop short at judging how one should spend their time. Just do you and you only.
So I'm curious, where am I judging? The OP literally asked "do I have to read the prospectus" and I said they can spend their time better elsewhere if improving investing results is their goal. I LITERALLY advised the poster to do what works for them.

I mean, you're the one throwing around the phrase: "wasting their lives away", that is a judgmental statement.
Guilty. Chalk it up as water cooler bantering. If the OP found something in the prospectus that we are not all aware of, we are all doomed. It’s all about learning something new and enjoying what you do for the OP, if he or she chooses to read the prospectus before making investment decisions.

Trust me! I worked hard and saved enough money. Now I’m just happy to waste my time...
MAKsdad
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Re: Do I have to read the prospectus before buying an index fund?

Post by MAKsdad »

Northern Flicker wrote: Tue May 04, 2021 12:43 pm
MAKsdad wrote: Tue May 04, 2021 9:24 am If I wanted to spend time thinking about my investments, I would spend it investing in individual stocks rather than reading a prospectus for an index fund. The whole point (for me) of index funds is that I don't have to think about it at all.
The time to read a prospectus, skipping or skimming some sections before investing is miniscuke in comparison to the time required to manage a portfolio of stocks with the funds, and it is unlikely you would avoid taking uncompensated risk if you tried to manage it yourself.
My point is only that index funds are perfect for us lazy folks.
hnd
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Re: Do I have to read the prospectus before buying an index fund?

Post by hnd »

some index funds do wonky stuff though so its good to read the prospectus to know if thats ok or not.

A long time ago, the NTF fund in TDA for the SP500 fund was SVSPX My initial investments all over, roth ira's, taxable, utma's etc etc I used SVSPX as the SP500 index vehicle. The issue was capital gains in those taxable accounts. the fund issues capital gains at 13% the share price! (and re-bought automatically with the distributions more shares)....VFINX or VOO for comparison....basically nothing.

obviously in the end total amount was the same. except now i had a giant chunk of gains i was not expecting to have to deal with. because i didn't read the prospectus.

I sold SVSPX out of my personal taxable but still have it in the childrens UTMA's as I realize $2200 in gains each year for them so its not a big deal. its no longer NTF at TDA either so to sell it it would cost me $50 each trade and i'm cheap.
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dratkinson
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Re: Do I have to read the prospectus before buying an index fund?

Post by dratkinson »

Yes, you must read the prospectus for each fund you own.

After reading a few, you can skim the boilerplate paragraphs describing risk of ownership. "Got it, nothing out of the ordinary, these are the standard ways I could lose money."

But the other stuff is important and you need to be aware of it.
--Investing methodology (market index vs reading entrails).
--How to buy shares (purchase limits, loads,...), sell shares (selling limits, fee,...), TLH (only by letter or fax,...),....
--Brokerage policies*.
--....


* Did you know Vanguard's Frequent Trading Policy (FTP) affects all mutual funds except ST bond funds and mmkt funds? Meaning, you must be aware of the order of transactions when rebalancing.

Okay (single account, taxable) transactions.
--Day1. Move money from checking to buy IT bond fund.
--Day2. Sell IT bonds to buy TSM.

Disallowed (single account, taxable) transactions.
--Day1. Sell IT bonds to buy TSM.
--Day2. Move money from checking to buy IT bond fund. (Violates Vanguard's FTP.)

There are multiple exceptions to the FTP, so you can get around it, but you'll need to read the prospectus to learn them.

All of this stuff and more is in the prospectus.


You must pay particular attention if you are researching something unique (single-state muni fund from a small fund family,...), as there are lot's of gotchas embedded in the fine print.
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niagara_guy
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Re: Do I have to read the prospectus before buying an index fund?

Post by niagara_guy »

Here is my experience: I read the prospectus (or at least the summary prospectus) for the s&p 500 index funds at Schwab, Fidelity and Vanguard. If I remember correctly, Vanguard's specifically says they match the s&p 500 index; the other two have wording that I think would allow them to deviate from the index which I don't like.
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celia
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Re: Do I have to read the prospectus before buying an index fund?

Post by celia »

I only read them when I can't fall asleep. But then I only get one sentence into it. :oops:

...Maybe that's why I dream of "reading" them...
alex_686
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

niagara_guy wrote: Tue May 04, 2021 6:37 pm Here is my experience: I read the prospectus (or at least the summary prospectus) for the s&p 500 index funds at Schwab, Fidelity and Vanguard. If I remember correctly, Vanguard's specifically says they match the s&p 500 index; the other two have wording that I think would allow them to deviate from the index which I don't like.
Having written prospects I can assure you that they have the same boilerplate legal paragraph saying that they can deviate by 20% from the index. The securities lawyers I worked with could go into great detail.

I can also say that the SEC takes it marketing regulations very seriously. If you have the magic word “index” or a index name in your fund’s name you are a index fund and you had better follow that index as closely as you can. This marketing regulation will not appear in the prospects.

As a example, consider the inclusion of Tesla into the S&P 500. That was a massive change. There wasn’t enough volume for all of the index funds to buy the necessary shares on the date of the change. Vanguard had to break with the index for 3 days to accumulate enough shares.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
shess
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Re: Do I have to read the prospectus before buying an index fund?

Post by shess »

I'm impressed by the number of people who are saying "I don't read the prospectus because I already know what the fund is". The prospectus is literally the information that the vendor provides about how they implement the fund. The fund's name has no real bearing on it, other than certain copyright issues (if the fund has S&P500 in the name, you probably can trust that Standard and Poor's is keeping an eye on it to make certain that it does a reasonable job of it, not down to the basis-point level, but certainly at the overall "Does this plausibly represent our index?" level).

Personally, I choose quality vendors, then mostly don't read their prospectus (meaning: I have in the past, but I don't keep up to date). I trust VTI (Vanguard Total Stock Market ETF) not because I read the prospectus, nor because I know that my assumptions about "Total Stock Market" are right, I trust it because it's from Vanguard, and also because I pay attention to this forum. On the other hand, if there was a Morgan Stanley Smith Barney Total Stock Market Fund, I would not invest in it even if you paid me to do so, even if you sat down with me to go over the prospectus closely, because in my opinion MSSB is not to be trusted with my investment dollar.
afan
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Re: Do I have to read the prospectus before buying an index fund?

Post by afan »

ebaron wrote: Tue May 04, 2021 10:01 am
afan wrote: Tue May 04, 2021 9:12 am
Doesn't this expose you to the risk of buying something that you would not otherwise buy if you had read the prospectus?
There was a thread by a poster who was outraged that their fund had been doing exactly what the prospectus said it would do, rather than what the poster assumed it would be doing. Based on nothing other than the name of the fund. The complainant was vehement in their expressed opinion that funds should do what they assumed they would do and they should not read a prospectus.

It was both sad and funny.
Do you have the link to that thread?
I wrote that off as corporate/legal speak. I'm sure if you read any prospectus, it will say and add all sort of caveat. That the S&P 500 fund for example, will not track S&P 500 index because of <laundry list of reasons>, which is to cover their asses from being sued. But in reality a good S&P 500 fund does track the index.

I also underestimated the magnitude of contango, and how persistent it could be.

You're also being mislead by the technicalities of tracking error. I was expecting USO for example to track oil prices period. It failed. Using Oil Futures benchmark as a benchmark is shady. At the end of the day, I am interested in buy-and-hold of oil prices. Oil Futures is just the tool of how it is done. I'm not interested in the process. I care about the outcome.

Of course I knew USO wasn't directly invested in spot oil price, but the naive belief 10 years ago, was that it would be a decent job. So instead of a S&P 500 index fund that gets A for tracking the index, I thought USO would maybe get a B for tracking oil prices. In hindsight, it's an F.
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Re: Do I have to read the prospectus before buying an index fund?

Post by kevinpet »

I've read a prospectus before. I found it a really good way to understand what ETFs really are.

Most of the content of a prospectus is useless garbage. The reason to read them is when you read the prospectus for a standard low cost ETF, you will then understand which parts are boilerplate "investing is risky" and what is actually worth paying attention to.

For example, this appears on the first page of the XIV prospectus:
As explained in “Risk Factors” in this pricing supplement, because of the way in which the underlying Indices are calculated, the amount payable at maturity or upon redemption or acceleration is likely to be less than the amount of your initial investment in the ETNs, and you are likely to lose part or all of your initial investment. In almost any potential scenario the Closing Indicative Value (as defined below) of your ETNs is likely to be close to zero after 20 years and we do not intend or expect any investor to hold the ETNs from inception to maturity.
"likely to be close to zero" is not the kind of warning that appears in boglehead type investments. And indeed, you could say they overdelivered and went to zero far sooner than expected.
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tooluser
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Re: Do I have to read the prospectus before buying an index fund?

Post by tooluser »

Example:

Vanguard International Growth Fund (VWIGX)
Investment Objective: The Fund seeks to provide long-term capital appreciation.

Principal Investment Strategies: The Fund invests predominantly in the stocks of companies located outside the United States and is expected to diversify its assets in countries across developed and emerging markets. In selecting stocks, the Fund’s advisors evaluate foreign markets around the world and choose large-, mid-, and small-capitalization companies considered to have above-average growth potential. The Fund uses multiple investment advisors. Each advisor independently selects and maintains a portfolio of common stocks for the Fund.
From these statements one can infer that:
1) VWIGX is a growth fund.
2) VWIGX is actively managed.
3) VWIGX invests predominately in foreign stock markets. (My emphasis on "predominately".)

Inference #3 is correct. However, according to the latest semi-annual report, 1/6 of VWIGX's holdings are in the USA. VWIGX's 5th largest holding is Tesla (TSLA), which had phenomenal stock price growth last year. One is probably not looking to invest internationally by holding a large amount of a USA company. That said, last year, that holding in Tesla totally made up for a decade or more of lagging international returns. I'm not unhappy with this situation, but it is kind of odd.

So "Hurray!" for active management when they use their powers correctly. But if they had been wrong...?

Did I recognize this subtlety in the prospectus 20 years ago when I first made my investment? No.

Conclusion: Prospectuses tell you some things, but not everything, or at least not everything all the time.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Nicolas »

I used to read them in the 80s. I quit about then.
Northern Flicker
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

Some tidbits that investors in VTI who haven't read the Statement of Additional Information (SAI) may not realize.

If you invest in VTI, are you immune from taking on liability for the fund's debt as a shareholder? The answer is: probably, but this is not guaranteed, depending on the state you live in. From the SAI:

Shareholder Liability. The Trust is organized under Delaware law, which provides that shareholders of a statutory trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. This means that a shareholder of a Fund generally will not be personally liable for payment of the Fund’s debts. Some state courts, however, may not apply Delaware law on this point. We believe that the possibility of such a situation arising is remote.

Did you know that the Vanguard funds can lend cash to other Vanguard funds, up to 15% of the fund's assets can be lent that way and up to 5% to a single fund. Also from the SAI:

Interfund Borrowing and Lending. The SEC has granted an exemption permitting registered open-end Vanguard funds to participate in Vanguard’s interfund lending program. This program allows the Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including, among other things, the requirements that (1) no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is typically available from a bank for a comparable transaction, (2) no fund may lend money if the loan would cause its aggregate outstanding loans through the program to exceed 15% of its net assets at the time of the loan, and (3) a fund’s interfund loans to any one fund shall not exceed 5% of the lending fund’s net assets. In addition, a Vanguard fund may participate in the program only if and to the extent that such participation is consistent with the fund’s investment objective and investment policies. The boards of trustees of the Vanguard funds are responsible for overseeing the interfund lending program. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs.

Securities lending can be up to 33.33% of fund assets. Combined with interfund loans, this means that almost half of the fund's assets theoretically can be lent out at any point in time. Basically, investors in a mutual fund or ETF are counting on the fund being managed in a prudent manner, and the full range of legally possible scenarios not being exercised.
Last edited by Northern Flicker on Wed May 05, 2021 11:12 am, edited 1 time in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
sureshoe
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Re: Do I have to read the prospectus before buying an index fund?

Post by sureshoe »

H-Town wrote: Tue May 04, 2021 1:22 pm Guilty. Chalk it up as water cooler bantering. If the OP found something in the prospectus that we are not all aware of, we are all doomed. It’s all about learning something new and enjoying what you do for the OP, if he or she chooses to read the prospectus before making investment decisions.

Trust me! I worked hard and saved enough money. Now I’m just happy to waste my time...
And I agree with this sentiment. There are lots of ways to spend time, what is the "best way" is up to you. I used to mow my lawn and change my own oil. Started paying people because it's just not worth the time. But I know guys who love doing this, maybe save a few bucks. But for anyone with real earning potential, your time is best spent elsewhere. That doesn't mean those guys are wrong.

Same with the prospectus. People like nerding out on this stuff, and god bless them. I would argue it's not necessary to earn the same rate of return... but that's always the challenge of the market, it's very hard to say "who's right". :)
BogleFan510
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Re: Do I have to read the prospectus before buying an index fund?

Post by BogleFan510 »

I think it is important to read at least one to understand what they say and internalize what you are buying. Practically speaking though, there are other sources for the key information, such as your brokerage firm's search tools, which summarize the key elements, such as fees, transferability, type of holdings.

The more exotic the index, the more likely it will be informative, as not all indexes are equal.
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Re: Do I have to read the prospectus before buying an index fund?

Post by JackoC »

sureshoe wrote: Wed May 05, 2021 7:38 am
H-Town wrote: Tue May 04, 2021 1:22 pm Guilty. Chalk it up as water cooler bantering. If the OP found something in the prospectus that we are not all aware of, we are all doomed. It’s all about learning something new and enjoying what you do for the OP, if he or she chooses to read the prospectus before making investment decisions.

Trust me! I worked hard and saved enough money. Now I’m just happy to waste my time...
And I agree with this sentiment. There are lots of ways to spend time, what is the "best way" is up to you. I used to mow my lawn and change my own oil. Started paying people because it's just not worth the time. But I know guys who love doing this, maybe save a few bucks. But for anyone with real earning potential, your time is best spent elsewhere. That doesn't mean those guys are wrong.

Same with the prospectus. People like nerding out on this stuff, and god bless them. I would argue it's not necessary to earn the same rate of return... but that's always the challenge of the market, it's very hard to say "who's right". :)
Of course it's up to the person, but I took the question to be asking for *opinions* about the value per unit time of reading MF/ETF prospectuses, though phrased 'do you have to?' Obviously you don't literally have to. But my *opinion* of the value per unit time in reading vanilla broad index fund prospectuses, from a trusted provided like Vanguard, is 'quite low'. There are technicalities and quirks of even vanilla funds, various question threads here sometimes illuminate them. But a prospectus is full of legalize disclaimers which don't really get to the practical point of things. For example it's noteworthy that some 'emerging markets' funds still include South Korea, and as a fairly major component when they do, and others (like Vanguard's VEMAX/VWO) do not. But you don't need to read a prospectus to find that out. It (again obviously) also depends on the person's background. I've read a lot of prospectuses, I never wrote prospectuses (the latter experience might give some people a more positive view of them as practical source of information than my view).

Also we're tending to assume the kind of funds commonly approved of here. If buying some actively managed leveraged fixed income closed end fund (because one assesses the discount to NAV as more than overcoming the high expense ratio) you should probably read everything, and will probably still find that certain aspects won't be clear. Prospectuses seldom deal effectively with quantitative issues like exactly how such a fund is achieving its leverage and what it's costing at a given time, which would be key in that case. You'd be more likely to tease that answer out of an annual report.
alex_686
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

JackoC wrote: Wed May 05, 2021 9:09 am But a prospectus is full of legalize disclaimers which don't really get to the practical point of things. For example it's noteworthy that some 'emerging markets' funds still include South Korea, and as a fairly major component when they do, and others (like Vanguard's VEMAX/VWO) do not. But you don't need to read a prospectus to find that out. It (again obviously) also depends on the person's background.
This is a good example of why I don't read prospectuses much. The inclusion of South Korea is not in the prospectus, nor the annual report, nor in the statement of additional information (SAI). It is in the index provider's white paper on methodology.
Northern Flicker wrote: Wed May 05, 2021 12:23 am Some tidbits that investors in VTI who haven't read the Statrment of Additional Information (SAI) may not realize.
...
Another good reason is here. Everything that Northern Flicker is citing is the maximum limits that regulation allows. Of course when the lawyers write up the prospectus they are going to use the maximum limits in the verbiage. Why handcuff the portfolio manager during a time of crisis? Why hand ammo to the shareholders when they are suing you?

For context, when I was writing prospectuses we would pull the prospectuses of 5 to 10 outside funds and comb over the differences.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
HootingSloth
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Re: Do I have to read the prospectus before buying an index fund?

Post by HootingSloth »

I have written (portions of) a few investment fund prospectuses, so I have some sense of how the sausage is made. To be honest, if I thought a fund was sufficiently complex/novel that reading the prospectus was worthwhile, I probably would be inclined not to invest in that fund in the first place. Obviously there could be exceptions to this, but I don't think it is necessary to read the prospectus for "total market" index funds with a well-established track record from a reputable investment firm like the kinds that would go into a traditional three-fund portfolio. My quirkiest holding is probably VWIUX (Vanguard Intermediate Tax-Exempt), which is actively managed. Maybe I would get something out of reading the prospectus for that, but I have not bothered. I would probably suggest reading prospectuses for certain other kinds of funds that get discussed here--like factor funds, leveraged ETFs, qualified opportunity funds, REITs, etc.--but I do not invest in these.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

alex_686 wrote:
Northern Flicker wrote: Wed May 05, 2021 12:23 am Some tidbits that investors in VTI who haven't read the Statement of Additional Information (SAI) may not realize.
...
Another good reason is here. Everything that Northern Flicker is citing is the maximum limits that regulation allows. Of course when the lawyers write up the prospectus they are going to use the maximum limits in the verbiage. Why handcuff the portfolio manager during a time of crisis? Why hand ammo to the shareholders when they are suing you?
What I love about the interfund lending program is this condition:

1) ... no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is typically available from a bank for a comparable transaction...

If Vanguard fund A lends to Vanguard fund B, both sides of the loan cannot get an interest rate more favorable than the typical bank rate. I take this condition to mean that the rate is below the typical bank rate so that investors in fund A are subsidizing investors in fund B. Most likely fund A would be a large AUM fund and B a small one.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
alex_686
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

Northern Flicker wrote: Wed May 05, 2021 11:32 am What I love about the interfund lending program is this condition:

1) ... no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is typically available from a bank for a comparable transaction...

If Vanguard fund A lends to Vanguard fund B, both sides of the loan cannot get an interest rate more favorable than the typical bank rate. I take this condition to mean that the rate is below the typical bank rate so that investors in fund A are subsidizing investors in fund B. Most likely fund A would be a large AUM fund and B a small one.
Funds can't cross subsidize each other. They are 2 separate corporations whose primary duty is to their shareholders. i.e., their investors. They all have to pay their own way. There should be elaborate accounting and compliance controls providing oversight. The exception to the rule is that the sponsor (top level of the fund family) can waive fees, but this is clearly stated in the prospectus.

In this case, the rate would have to higher than what A could lend out for and lower than what B could borrow from. And there are legitimate cases where this happens. Banks do have spreads between the lending and borrowing rate. The operational cost of loaning internally is lower than that of externally. Sometimes the market does freeze up, like last spring.

But there has to be a big file on somebody's desk showing that both funds A and B are soliciting external sources to prove that this is the best course of action for both funds.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

A question to those who strongly suggest that you read the prospectus before buying a fund: Do you read the new prospectus every year?

If you need to read the prospectus before buying the fund, this means that the prospectus contains valuable information. The prospectus gets updated every year. This suggests that you should read the prospectus every year so you understand how this valuable information is updated.

I think it is important to understand how your portfolio works. This involves reading up on the economy, business news, investment theory, tax, and the nuts and bolts of how your investment accounts works. This means prospectuses, annual reports, SIA, and index methodologies.

In my opinion, prospectus - while important - tend to be the least important of everything that I have mentioned. This includes exotic funds doing odd things.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

alex_686 wrote: In this case, the rate would have to higher than what A could lend out for and lower than what B could borrow from. And there are legitimate cases where this happens. Banks do have spreads between the lending and borrowing rate
That makes sense. Generally, I think shareholder's main protections in mutual/exchange-traded funds are the Investment Company Act of 1940 and related laws, SEC rules, and regular audits.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Do I have to read the prospectus before buying an index fund?

Post by afan »

alex_686 wrote: Wed May 05, 2021 12:20 pm A question to those who strongly suggest that you read the prospectus before buying a fund: Do you read the new prospectus every year?

If you need to read the prospectus before buying the fund, this means that the prospectus contains valuable information. The prospectus gets updated every year. This suggests that you should read the prospectus every year so you understand how this valuable information is updated.

I think it is important to understand how your portfolio works. This involves reading up on the economy, business news, investment theory, tax, and the nuts and bolts of how your investment accounts works. This means prospectuses, annual reports, SIA, and index methodologies.

In my opinion, prospectus - while important - tend to be the least important of everything that I have mentioned. This includes exotic funds doing odd things.
I do.

I find them interesting in themselves. I sometimes read the prospectus and SAI of funds I do not own if I am curious about them.

There is a lot of meaningless boilerplate but there are important details about how the funds work.

The prospectus is quite short for any fund I would remotely consider. The SAI can get longer, which is why I only read them if they are for a fund I own or am quite interested in.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

alex_686 wrote: Funds can't cross subsidize each other. They are 2 separate corporations whose primary duty is to their shareholders. i.e., their investors. They all have to pay their own way.
That is generally the case, but not fully true. There are examples of funds that not only can use soft dollar arrangements with brokers to hide some of the administrative expense in transaction cost, where it is not accounted for in ER, but can use soft dollar transaction commissions to pay for services needed for the administration of other funds. Fidelity "Zero" funds are an example. From the SAI:

The Acquisition of Brokerage and Research Products and Services

Brokers (who are not affiliates of FMRC) that execute transactions for a fund may receive higher compensation from the fund than other brokers might have charged the fund, in recognition of the value of the brokerage or research products and services they provide to Geode.


Research Products and Services. These products and services may include, when permissible under applicable law: economic, industry, company, municipal, sovereign (U.S. and non-U.S.), legal, or political research reports; market color; company meeting facilitation; compilation of securities prices, earnings, dividends and similar data; quotation services, data, information and other services; analytical computer software and services; and investment recommendations. In addition to receiving brokerage and research products and services via written reports and computer-delivered services, such reports may also be provided by telephone and in person meetings with securities analysts, corporate and industry spokespersons, economists, academicians and government representatives and others with relevant professional expertise. Geode may request that a broker provide a specific proprietary or third-party product or service. Some of these products and services supplement Geode's own research activities in providing investment advice to the funds.
...
Geode's Decision-Making Process. Before causing a fund to pay a particular level of compensation, Geode will make a good faith determination that the compensation is reasonable in relation to the value of the brokerage and/or research products and services provided to Geode, viewed in terms of the particular transaction for the fund or Geode's overall responsibilities to the fund or other investment companies and investment accounts. While Geode may take into account the brokerage and/or research products and services provided by a broker in determining whether compensation paid is reasonable, neither Geode nor the funds incurs an obligation to any broker, dealer, or third party to pay for any product or service (or portion thereof) by generating a specific amount of compensation or otherwise. Typically, these products and services assist Geode in terms of its overall investment responsibilities to a fund and other investment companies and investment accounts; however, each product or service received may not benefit the fund. Certain funds or investment accounts may use brokerage commissions to acquire brokerage and research products and services that may also benefit other funds or accounts managed by Geode.

https://www.actionsxchangerepository.fi ... 6%23102%23
Last edited by Northern Flicker on Thu May 06, 2021 4:17 pm, edited 1 time in total.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

Northern Flicker wrote: Thu May 06, 2021 1:12 am
alex_686 wrote: Funds can't cross subsidize each other. They are 2 separate corporations whose primary duty is to their shareholders. i.e., their investors. They all have to pay their own way.
That is generally the case, but not fully true. There are examples of funds that not only can use soft dollar arrangements with brokers to hide some of the administrative expense in transaction cost, where it is not accounted for in ER, but can use soft dollar transaction commissions to pay for services needed for the administration of other funds. Fidelity "Zero" funds are an example. From the SAI:
There is no cross subsidization. You are misreading what you are seeing. In the section you quote it never implies that there is cross subsidization.

This is standard boilerplate stuff driven by regulations. Having worked with this stuff behind the scenes let me lift the curtains. When I was working in this field, there were 2 to 4 accountants to ensure compliance on this issue at my firm.

1. "Brokerage belongs to the client". Soft dollars that are generated from Fund X's trades belong to Fund X. Their are exceptions to this rule, but none that apply to funds. They like they can't give cash to another fund, employees, or random people on the street, they can't give away those soft dollars . It belongs to the shareholders of the fund. i.e., you, the investor. Cross subsidization is bared.

2. Soft dollars may only be used in assisting the portfolio manager in investment decisions.

2a. They may not be used for operations or administrative expenses. The 2 examples you give are for portfolio management. Now, you may be using administrative expenses in a casual fashion. However, the list of allowable expenses is limited.

2b. Mutual funds are required to seek best execution. i.e., highest value for the lowest cost. Funds may place trades at a higher cost to get access to soft dollars. Brokerage has value in portfolio management decisions. But here is the real kicker for the Fidelity Zero Funds. What help do they need in the portfolio management decisions? Very little. They just have to follow the index. Thus the value of soft dollars to Fidelity Zero Fund would be very low.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

alex_686 wrote: There is no cross subsidization. You are misreading what you are seeing. In the section you quote it never implies that there is cross subsidization.
This is not biolerplate language across the industry. It probably isn't cross-fund subsidy because the fund is not making expenditures with transactions above and beyond normal transaction cost that in aggregate exceed the actual cost of running the "zero" fund.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

Northern Flicker wrote: Thu May 06, 2021 12:32 pm It probably isn't cross-fund subsidy because the fund is not making expenditures with transactions above and beyond normal transaction cost that in aggregate exceed the actual cost of running the "zero" fund.
This has nothing to do with it.

Cross subsidization is prohibited by SEC regulation, and there is a fair amount of that regulation specific to soft dollars. Period.

I think we have done this dance before. If I recall correctly you think that soft dollars are a deeply troubling form of corruption that induces conflicts of interest. This is a fair and valid opinion. I don't share that opinion entirely, but agree that it is open to abuse. The problems are not the blatant subsidization of either expenses or cross-subsidization. That is well covered in the regulations.
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Re: Do I have to read the prospectus before buying an index fund?

Post by afan »

The more interesting aspect of this is the way Fidelity sends business of the zero funds to other affiliated companies within the Fidelity organization. Those companies profit on this business and the profits flow to Fidelity. All without showing up as an expense ratio. Good example of how zero ER does not mean free.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

alex_686 wrote: Thu May 06, 2021 1:05 pm
Northern Flicker wrote: Thu May 06, 2021 12:32 pm It probably isn't cross-fund subsidy because the fund is not making expenditures with transactions above and beyond normal transaction cost that in aggregate exceed the actual cost of running the "zero" fund.
This has nothing to do with it.

Cross subsidization is prohibited by SEC regulation, and there is a fair amount of that regulation specific to soft dollars. Period.

I think we have done this dance before. If I recall correctly you think that soft dollars are a deeply troubling form of corruption that induces conflicts of interest. This is a fair and valid opinion. I don't share that opinion entirely, but agree that it is open to abuse. The problems are not the blatant subsidization of either expenses or cross-subsidization. That is well covered in the regulations.
I am not suggesting it is being abused other than for false advertising. Soft dollar arrangements with brokers violate transparency and should be illegal. Mutual funds should be required to publish 12 month trailing expenses every month for all expenses, including transaction costs with soft dollar enhancements, and not just the expenses that they include in ER. As a customer, you are entitled to know transparently what a product or service is costing you. You may not feel that is important. If so, we will just have to disagree on that point.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

Northern Flicker wrote: Thu May 06, 2021 2:51 pm I am not suggesting it is being abused other than for false advertising. Soft dollar arrangements with brokers violate transparency and should be illegal. Mutual funds should be required to publish 12 month trailing expenses every month for all expenses, including transaction costs with soft dollar enhancements, and not just the expenses that they include in ER. As a customer, you are entitled to know transparently what a product or service is costing you. You may not feel that is important. If so, we will just have to disagree on that point.
Well, that is very easy. It is $0 hard dollars. :twisted:

I kid somewhat, but only somewhat. You are asking to measure something in dollars - to the penny - that can't be measured.

Soft dollars are not actual dollars that can be claimed. They are more akin to airline miles or loyalty points. You go to the airport and use your points to upgrade from business to first class. No receipt is generated. Can you tell me the value of the upgrade to the penny? Yes, but using some subjective modeling I can get a decent estimate, but that is not how SEC regulations are expense reporting works.

Some of the stuff you buy with soft dollars are easy to estimate. Others are next to impossible. What is the value in getting a analysis report on day 3, verse on day 1, verses being able to sit down with the stock analysis who wrote the report and ask detailed questions?

On a broader note, you know that most trading expenses are excluded from the expense ratio? If I put in a over-the-counter principle trade to buy a block of equity from a broker there is no commission. Sure, the broker is probably making a profit but the costs are not broken out. So what do you report as a expense? FYI, this principle trade probably would generate soft dollars.
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Re: Do I have to read the prospectus before buying an index fund?

Post by chris319 »

A true Boglehead doesn't have that many holdings, so you have a small number of prospectuses to read.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

chris319 wrote: Thu May 06, 2021 3:35 pm A true Boglehead doesn't have that many holdings, so you have a small number of prospectuses to read.
Oh contraire. Consider a Boglehead who choses to invest in a S&P 500 fund.

There are at least a half dozen high quality S&P 500 funds out there. So to pick one you should read all of them to pick the best fund.

If you think that a prospectus has critical information, that information gets updated every year. So you have to read the prospectus again, plus all of the other contenders out there.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

alex_686 wrote: Soft dollars are not actual dollars that can be claimed. They are more akin to airline miles or loyalty points. You go to the airport and use your points to upgrade from business to first class. No receipt is generated. Can you tell me the value of the upgrade to the penny? Yes, but using some subjective modeling I can get a decent estimate, but that is not how SEC regulations are expense reporting works.
This is a preposterous analogy. The Fidelity SAI states explicitly that they pay more than the going rate for transactions because they get goods and services used for fund administration in return. This is purely and simply a way to charge expenses to the fund without accounting for them in ER. The goods and services may include exchange ticker data, software, computer hardware, and financial analysis.

If you pay $800 for a round trip ticket from LA to NYC, and the airline gives you a "free" laptop worth $400 as a "reward", then you paid $400 for the plane ticket and bought a laptop for $400 in the same transaction. That we cannot separate transaction commissions from the dollar value of goods and services precisely is just a further source of opacity.

Any way you spin it, the fund was charged for an expense. Higher expenses mean an index fund will do a higher volume of securities lending to avoid the effect of the expense drag on index tracking, taking more securities lending risk, further obfuscating what is going on.

These differences from fund provider to fund provider are not major differences, but they certainly are within the realm of a criterion for considering one fund provider over another if we had transparent data about the actual costs.
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Re: Do I have to read the prospectus before buying an index fund?

Post by chris319 »

I like the capsule summaries on Yahoo! Finance. They give me a good idea of what's what without all the legalese.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

First, let me say that I know where you are coming from. I had a similar opinion prior to having to dig deep in the subject.

Let us step back and focus on SEC reporting. They like objective values that can be independently verified. They like to audit things. They want everybody to use the same methodology. They dislike systems that can be gamed. For the last two, they want investors to make apples to apples comparensions.
Northern Flicker wrote: Thu May 06, 2021 3:52 pmIThat we cannot separate transaction commissions from the dollar value of goods and services precisely is just a further source of opacity.
First, "Transaction Commissions" is specifically the wrong word and I think is a source of our differences. The correct word is brokerage. Commissions only cover the identifiable cost or a specific transaction for Agency Trades. This leaves out Principal Trades, which don't have a specific identifiable costs for a transaction. It leaves out a fair number of other costs.
Northern Flicker wrote: Thu May 06, 2021 3:52 pm This is a preposterous analogy. The Fidelity SAI states explicitly that they pay more than the going rate for transactions because they get goods and services used for fund administration in return. This is purely and simply a way to charge expenses to the fund without accounting for them in ER. The goods and services may include exchange ticker data, software, computer hardware, and financial analysis.
That language was written by lawyers to "C.Y.A." (if you know what I mean). It does not reflect reality. Is a 27k Toyota Camry 2k more expensive than a 25k Honda Accord? No. Explicate commissions expenses are a very small part of the equation. Trying to dissect the trading costs is hard subjective estimate.
Northern Flicker wrote: Thu May 06, 2021 3:52 pm If you pay $800 for a round trip ticket from LA to NYC, and the airline gives you a "free" laptop worth $400 as a "reward", then you paid $400 for the plane ticket and bought a laptop for $400 in the same transaction. That we cannot separate transaction commissions from the dollar value of goods and services precisely is just a further source of opacity.
Lets modify this example so it is closer to reality.

You pay $800 for a round trip ticket from LA to NYC. You then redeem $100,000k in soft dollars to buy the cheap laptop. There is no retail version of this laptop. It is bespoke. There is no price on the laptop. Or, if there is, there is no way to independently verify it.

Note - Why would anybody pay $100k for a laptop? Because, it is not US dollars, rather "soft dollars". These are not dollars, they are points. They are more akin to a foreign currency.

Did you get something of value? Yes.

Is this corrupting? Possible.

Can you calculate the value of the laptop? Can you justify a price of $400.00? Or, to invert the question, can you prove that the value is not $387.52? Remember, the SEC wants a objective mythology that can't be gamed. So you can't ask the airline what the value is.

And this is for the easy stuff like "exchange ticker data, software, computer hardware" The last one you mentioned, financial analysis, is very common and very hard to evaluate. As a example, consider convertible bond funds. Bond trades are almost always principal trades, so no commissions. Yet soft dollars are generated. Those soft dollars are used buy ideas, advice, and preferential access. None of these can be objectively valued.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

You are overly focused on demonstrating a lack of corruption, but that is not my claim in the first place.

What the SEC rules and audits are doing is ensuring some semblance of fair value paid through excess commissions for the goods and services received. The SAI makes a point of stating that the extra cost is commensurate with value received. Although your posting suggests that it is difficult to establish fair value for the goods and services, let's assume that the excess commissions are paying for goods and services of commensurate value.

The point is not that there is corruption in this process. The point is that by packaging these expenses with broker commissions, they are excluded from being accounted for in ER. That's it. It is quite simple. There is no need to make it complicated. It enables fund companies to advertise ERs that understate actual cost. Whether that is deliberate, or an inadvertant consequence of some arbitrarily chosen strategy, either way, it leads to ER understating actual cost, and a reduction in fund transparency.
Last edited by Northern Flicker on Sat May 08, 2021 10:31 pm, edited 1 time in total.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

Northern Flicker wrote: Fri May 07, 2021 3:11 pm ... let's assume that the excess commissions are paying for goods and services of commensurate value.

The point is that by packaging these expenses with broker commissions, they are excluded from being accounted for in ER. ... There is no need to make it complicated.
To restate, my argument is that you can't measure either the cost or the benefit at meet SEC calculation standards.

If we are not going to make this complicated, then how would you calculate the expenses associated with the following trade:

$1m Corporate AA bond
Generates $1,000 in soft dollars
Commissions: $0 (this is a principal trade)

Please consider the following things:

1. What is the expense in dollars?

2. What is the excess commission paid for this trade?

3. What portion of that expense represents soft dollars?

4. Are you counting the explicate trading cost, or are you also including the implicit costs as well?

I mean, the majority of trading expenses are implicit, for example the bid/ask spread. I don't think we want to encourage portfolio managers to use cheap brokerages to artificially reduce their trading expenses if it means worse results.

Right now, almost no trading expenses are included in the expense ratio. It took me a while to wrap my head around this and understand why.
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Re: Do I have to read the prospectus before buying an index fund?

Post by Northern Flicker »

If the fund provider says in their SAI that they pay more than the going rate for trades, and receive goods and services used for fund administration in return as compensation, I believe them. The difficulty in quantifying it just amplifies the loss of transparency further. If you want to believe that you, as a fund investor, are being subsidized by the brokers with this, be my guest.
Last edited by Northern Flicker on Sun May 09, 2021 3:03 am, edited 2 times in total.
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Re: Do I have to read the prospectus before buying an index fund?

Post by ruud »

alex_686 wrote: Wed May 05, 2021 12:05 pm Funds can't cross subsidize each other. They are 2 separate corporations
Out of curiosity, are funds that are part of the same trust still considered separate? E.g. Vanguard Total Stock Market Fund and Vanguard 500 Index Fund are both part of the "Vanguard Index Funds Trust", for example.
.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

ruud wrote: Fri May 07, 2021 8:33 pm
alex_686 wrote: Wed May 05, 2021 12:05 pm Funds can't cross subsidize each other. They are 2 separate corporations
Out of curiosity, are funds that are part of the same trust still considered separate? E.g. Vanguard Total Stock Market Fund and Vanguard 500 Index Fund are both part of the "Vanguard Index Funds Trust", for example.
I am not exactly sure what you are trying to say, but no. This how funds work. I might biff the exact names in the Vanguard complex.

Funds are zero employe corporations.

The corporation issues shares to the owners. That is, the investors. These are the only owners of the fund.

They have a “independent” board of directors. I put “independent” in quotes because we know how independent they are. Mutual fund boards even less so. For Vanguard, at the bottom of the barrel.

The board of directors then hires 2 subcontractors. One for admission and marketing. The other is for portfolio management. These are 2 separate corporations. They are often owned by the same parent company.
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Re: Do I have to read the prospectus before buying an index fund?

Post by ruud »

alex_686 wrote: Fri May 07, 2021 9:22 pm
ruud wrote: Fri May 07, 2021 8:33 pm
alex_686 wrote: Wed May 05, 2021 12:05 pm Funds can't cross subsidize each other. They are 2 separate corporations
Out of curiosity, are funds that are part of the same trust still considered separate? E.g. Vanguard Total Stock Market Fund and Vanguard 500 Index Fund are both part of the "Vanguard Index Funds Trust", for example.
I am not exactly sure what you are trying to say, but no. This how funds work. I might biff the exact names in the Vanguard complex.

Funds are zero employe corporations.
What I am asking is when you are referring to "corporations", does that refer to the fund or to the trust the fund is a part of?

For example, see the Statement of Additional Information for the Vanguard Total International Index Fund (VTIAX). This Fund is part of the "Vanguard Star Funds Trust". The SAI doc says:
Vanguard STAR Funds (the Trust) currently offers the following funds and share classes (identified by ticker symbol):
...
(5 other funds)
Vanguard Total International Stock Index Fund VTIAX
...
The Trust was organized as a Pennsylvania business trust in 1983 and was reorganized as a Delaware statutory trust in 1998. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. All Funds within the Trust are classified as diversified within the meaning of the 1940 Act.
When you say "a fund is a corporation", I am just curious how that applies in this case. What entity is the corporation you are referring to here? The "Vanguard Total International Stock Index Fund", or the "Vanguard Star Funds Trust" which has 6 mutual funds (one of which being VTIAX)?

For all practical purposes, it doesn't matter. But I'm just curious how these things are organized.
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Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

ruud wrote: Sat May 08, 2021 10:08 am When you say "a fund is a corporation", I am just curious how that applies in this case. What entity is the corporation you are referring to here? The "Vanguard Total International Stock Index Fund", or the "Vanguard Star Funds Trust" which has 6 mutual funds (one of which being VTIAX)?
Funds must be separate corporations.

Vanguard’s structure is very byzantine, even by fund standards. I believe that the Star Trust is the separate corporation that provides admin and marketing services to Vanguard Total International Stock Index Fund.

So, you buy shares in Vanguard Total International Stock Index Fund. You become a investor in that corporation. The fund has zero employees but still needs to get stuff done. Strike the NAV, file taxes, etc. It hires Vanguard Star Funds Trust to do this. Vanguard Star Funds Trust is a separate corporation.
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Re: Do I have to read the prospectus before buying an index fund?

Post by HootingSloth »

ruud wrote: Sat May 08, 2021 10:08 am
alex_686 wrote: Fri May 07, 2021 9:22 pm
ruud wrote: Fri May 07, 2021 8:33 pm
alex_686 wrote: Wed May 05, 2021 12:05 pm Funds can't cross subsidize each other. They are 2 separate corporations
Out of curiosity, are funds that are part of the same trust still considered separate? E.g. Vanguard Total Stock Market Fund and Vanguard 500 Index Fund are both part of the "Vanguard Index Funds Trust", for example.
I am not exactly sure what you are trying to say, but no. This how funds work. I might biff the exact names in the Vanguard complex.

Funds are zero employe corporations.
What I am asking is when you are referring to "corporations", does that refer to the fund or to the trust the fund is a part of?

For example, see the Statement of Additional Information for the Vanguard Total International Index Fund (VTIAX). This Fund is part of the "Vanguard Star Funds Trust". The SAI doc says:
Vanguard STAR Funds (the Trust) currently offers the following funds and share classes (identified by ticker symbol):
...
(5 other funds)
Vanguard Total International Stock Index Fund VTIAX
...
The Trust was organized as a Pennsylvania business trust in 1983 and was reorganized as a Delaware statutory trust in 1998. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. All Funds within the Trust are classified as diversified within the meaning of the 1940 Act.
When you say "a fund is a corporation", I am just curious how that applies in this case. What entity is the corporation you are referring to here? The "Vanguard Total International Stock Index Fund", or the "Vanguard Star Funds Trust" which has 6 mutual funds (one of which being VTIAX)?

For all practical purposes, it doesn't matter. But I'm just curious how these things are organized.
alex_686 is speaking very loosely, which is leading to some inaccuracy in what he is saying. None of these Vanguard mutual funds are corporations. I am not exactly an expert in this very niche area, but my understanding is as follows: The separate legal entity (Vanguard STAR Funds in your example) is a special form of unincorporated association called a Delaware Startutory Trust. Governance and oversight functions for each of the funds and share classes issued by this trust are performed by a single board of trustees, as governed by Delaware law and the trust's organizational documents. The separate funds and share classes are not creatures of state corporate/company/trust law, but instead are established under the Investment Company Act (specifically Rule 18(f)), which allows a single investment company (in this case, Vanguard STAR Funds, the trust) to have multiple series or classes (in this case, the different funds listed as part of the trust), each of which has special rights to different subsets of the assets of the investment company. The funds, in turn, are permitted to issue different share classes with somewhat different terms (e.g., Admiral vs Investor). I imagine that any restrictions on cross-subsidization come from the SEC rules, not the Delaware rules, and so are unlikely to be related to whether there is a separate legal entity or separate board for the two funds.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
ruud
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Re: Do I have to read the prospectus before buying an index fund?

Post by ruud »

HootingSloth wrote: Sat May 08, 2021 1:21 pm The separate legal entity (Vanguard STAR Funds in your example) is a special form of unincorporated association called a Delaware Startutory Trust. [...] I imagine that any restrictions on cross-subsidization come from the SEC rules, not the Delaware rules, and so are unlikely to be related to whether there is a separate legal entity or separate board for the two funds.
Thank you for taking the time to explain this in detail.
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alex_686
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Joined: Mon Feb 09, 2015 2:39 pm

Re: Do I have to read the prospectus before buying an index fund?

Post by alex_686 »

HootingSloth wrote: Sat May 08, 2021 1:21 pm alex_686 is speaking very loosely, which is leading to some inaccuracy in what he is saying. None of these Vanguard mutual funds are corporations. I am not exactly an expert in this very niche area ...
I was speaking very specifically. I worked in mutual fund accounting for 10 years. See my signature.

Not with Vanguard, but I can’t see how they could dodge these rules. A “ separate legal entity” by definition has to be a separate independent corporation.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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