What are the index fund costs beyond bid ask?

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Kelly
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What are the index fund costs beyond bid ask?

Post by Kelly » Mon Sep 21, 2015 10:40 pm

My apologies if this has already been covered. If it has I can't find it.

The SP 500 (VFINX) has an expense of 0.17%, while the Mid Cap (VISMX) costs 0.23%. Is there anything beyond bid ask to account for Mid Caps higher price?

FTSE All World Ex US (VFWIX) cost 0.29%. Are there additional costs because VGD has to convert back to dollars or account for prices when overseas markets are closed?

This is strictly and academic question. I happily own all of them but I'd like to better understand them.

Thanks for any insight!

Kelly

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Christine_NM
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Re: What are the index fund costs beyond bid ask?

Post by Christine_NM » Mon Sep 21, 2015 10:53 pm

I'd guess that VFINX is cheaper than VIMSX because it is so much larger -- 200 billion vs 60 billion for all share classes of the two funds. International funds seem to always cost a little more but I'm not sure exactly why -- many of the larger companies can be bought as ADRs on NYSE (American Depository Receipts) so are no more expensive to trade than US stocks.
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IPer
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Re: What are the index fund costs beyond bid ask?

Post by IPer » Mon Sep 21, 2015 11:10 pm

Um in what I have read this shouldn't have much to do with bid/ask difference. Most likely:

1. S&P 500 is very popular so much larger so that brings the expense down significantly.
2. Mid Cap has way more than 500 stocks so that brings the expense up significantly.
3. Overseas are always more expensive, must be some administrative and pricing issues, including
but not limited to currency conversion and the ways stocks are actually owned.

Please someone yell at me if I forgot something, my head isn't in it today.
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oneleaf
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Re: What are the index fund costs beyond bid ask?

Post by oneleaf » Mon Sep 21, 2015 11:54 pm

Bid-ask are trading costs and are not included in the ER. Similarly, I believe any currency conversions are trading costs that are also not included in the ER. So the ER difference is due to other factors, probably primarily assets under management.

JDDS
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Re: What are the index fund costs beyond bid ask?

Post by JDDS » Tue Sep 22, 2015 6:49 am

Right, the expense ratios cover administrative/management costs. Some costs will be fixed or grow at a small rate when assets under management grow. Thus economies of scale can help to decrease an expense ratio.

alex_686
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Re: What are the index fund costs beyond bid ask?

Post by alex_686 » Tue Sep 22, 2015 6:56 am

oneleaf wrote:Bid-ask are trading costs and are not included in the ER. Similarly, I believe any currency conversions are trading costs that are also not included in the ER. So the ER difference is due to other factors, probably primarily assets under management.
I would put some stock in the trading costs, but obviously not the bid/ask spread. Commissions tend to be a higher percentage of a trade for mid caps than large. I also suspect that a mid cap would need to trade more than a large cap. FX conversions probably do flow into the expense ratio. There are explicit costs, not just the implicated FX spread.

Plus, the fund is smaller, so that does not help.

You can dig into the prospectus and the supplementary prospectus - that will break down the costs. Fund admin, trading, investment management, etc.

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JoMoney
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Re: What are the index fund costs beyond bid ask?

Post by JoMoney » Tue Sep 22, 2015 7:05 am

ER does not include brokerage fees, bid/ask spreads, or any other transaction costs. The ER is mostly just the administrative expenses to operate the fund. Some of those expenses are fixed regardless of the size of the fund, so those costs become a smaller percentage when the fund is larger with more assets under management. Other expenses grow dependening on the size, but generally speaking, with Vanguard the more assets under management of the index fund the lower the expense ratio.

If it costs $100,000 to operate a fund regardless of size,
that`s .10% on a fund with $100Million of assets under management, but only .01% of a fund with $1Billion AUM
Not all expenses are fixed, but hopefully you get the idea.
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oneleaf
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Re: What are the index fund costs beyond bid ask?

Post by oneleaf » Tue Sep 22, 2015 10:39 am

alex_686 wrote:
oneleaf wrote:Bid-ask are trading costs and are not included in the ER. Similarly, I believe any currency conversions are trading costs that are also not included in the ER. So the ER difference is due to other factors, probably primarily assets under management.
I would put some stock in the trading costs, but obviously not the bid/ask spread. Commissions tend to be a higher percentage of a trade for mid caps than large. I also suspect that a mid cap would need to trade more than a large cap. FX conversions probably do flow into the expense ratio. There are explicit costs, not just the implicated FX spread.
These are all true, but they are hidden costs that are not part of the ER. The OP was attributing trading costs and spreads to the higher ER, when in fact those are hidden costs in ADDITION TO the higher ER.

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simplesimon
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Re: What are the index fund costs beyond bid ask?

Post by simplesimon » Tue Sep 22, 2015 10:48 am

Liquidity will impact price. A different thread links a WSJ article that talks about this pertaining to bond index funds.

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seeshells
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Re: What are the index fund costs beyond bid ask?

Post by seeshells » Tue Sep 22, 2015 10:55 am

Phineas J. Whoopee wrote:Many ways, all of which are carefully designed not to show up as line items in your account. Here are a few off the top of my head. No doubt there are more. Some have already been mentioned by other posters.

They invest your settlement money at several basis points while paying you, I should think, around 0.01%. Even just a few hours of loaned out cash earns money. It may be a small percentage, perhaps, today, but millions upon millions of dollars in earnings that they keep is still a lot.

They receive fees from trading venues, for routing your orders there.

They run their own dark pool, and their less-dark pool, MarketPro*, for which they're paid.

They buy and sell from and to you for their own inventory when they have or need what you want to trade, and charge you a spread (think of a store owner who buys wholesale and sells retail).

If you have a margin account, and it's possible you do even if you don't know it, they lend your securities out to short sellers, charge them rent, and collect the interest on the collateral.

They cross-sell and up-sell you additional services (maybe not you personally, but your neighbor and everyone who looks like h/er/im).

They engage in the soft dollar business.

They sell information they've gathered about you.

Do you ever see so-called news stories when you log in? They sell organizations access to you.

That's the tip of the iceberg. Wall Street is not in the business of giving anything away for free.

Always pay lots of attention to costs and turnover.

PJW
(*per PJWs advice initially)
I'd suspect SPYs (A SP500s ETF, one of many ETFs following the SP500) has a bid/ask spread where you loose money to the market maker both selling and buying ! VG uses dark pools too*! As PJW says!
Always pay lots of attention to costs and turnover. Good luck!
Last edited by seeshells on Tue Sep 22, 2015 7:28 pm, edited 2 times in total.

Kelly
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Re: What are the index fund costs beyond bid ask?

Post by Kelly » Tue Sep 22, 2015 11:15 am

It does seem that Int'l funds are always costlier regardless of size. Any insight?

The phone desk at VGD didn't know the full story either. Although, interestingly, he suspected that some of the cost difference may be attributed to the assumption that one index provider cost more than another.

Kelly

alex_686
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Re: What are the index fund costs beyond bid ask?

Post by alex_686 » Tue Sep 22, 2015 11:51 am

Kelly wrote:It does seem that Int'l funds are always costlier regardless of size. Any insight?

The phone desk at VGD didn't know the full story either. Although, interestingly, he suspected that some of the cost difference may be attributed to the assumption that one index provider cost more than another.
I don't think it would be from the index provider. Or at least, minimal so. It is just more expensive to run a international fund. You need to have multiple accounts across different jurisdictions. There are explicit costs in FX trading. Fund admin is more expensive, in particular with regard to taxes. Lots of paperwork there.

hlfo718
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Re: What are the index fund costs beyond bid ask?

Post by hlfo718 » Tue Sep 22, 2015 11:53 am

For int'l funds the custody fee is more expensive than domestic funds. Custody fee normally breaks down to two major areas, transaction fees and safe keeping fee. Transaction fee is per transaction whereas safe keeping fee is per AUM of each country. But given the size of Vang and how cost conscience they are, I am sure they have negotiated a very modest price from each of the custodian.

International security pricing is also a bit more expensive as well as the fund has to pay for fair value pricing subscription.

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Phineas J. Whoopee
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Re: What are the index fund costs beyond bid ask?

Post by Phineas J. Whoopee » Tue Sep 22, 2015 7:58 pm

Thanks for the vote of confidence, seeshells.

I'd just like to clarify for everybody that the post of mine you quoted is from last week's thread How does Merril Lynch make money off of me?, about how ML can earn a profit despite no commissions charged to its OP, MrNewEngland. I wasn't writing specifically about Vanguard or its funds, although indeed the main point, which you correctly emphasized, always pay lots of attention to costs and turnover, applies to any and all financial firms. Vanguard no more gets a pass on it than anybody else.

We're watching you, McNabb!

Cheers. :sharebeer

PJW

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