Why does VTEAX have a purchase fee?

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masonstone
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Why does VTEAX have a purchase fee?

Post by masonstone »

Why does VTEAX have a purchase fee even if purchased on Vanguard.com?
GrowthSeeker
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Re: Why does VTEAX have a purchase fee?

Post by GrowthSeeker »

Good question, because the corresponding ETF does not (VTEB)
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Puretaxableindexer
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Re: Why does VTEAX have a purchase fee?

Post by Puretaxableindexer »

I never understood the reason Vanguard has "purchase fees" for funds. I believe I have a couple of Vanguard funds that charge them.
Anyone have any idea why? Other than making extra cash for them.
Northern Flicker
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Re: Why does VTEAX have a purchase fee?

Post by Northern Flicker »

These are not loads that make money for Vanguard. They are fees paid into the fund so that investors in the fund benefit, not Vanguard.

The main purpose is to discourage short-term trading for mutual funds where transaction costs relative to fund size are such that a short round trip in and out of the fund would be detrimental to other investors in the fund. In this case, muni's are not a particularly liquid investment.

Essentially, an incoming investor is paying their own transaction cost for their deposit to be invested, instead of having it charged off to other investors.

When an investor wants to liquidate ETF shares, they are sold to another investor so the fund bears no cost for that.
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Geologist
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Re: Why does VTEAX have a purchase fee?

Post by Geologist »

I’m not sure what you mean by “making extra cash for them.”

As the Vanguard Tax-Exempt Bond Index Fund (it is better to give the fund name as well as the ticker because most people on this discussion board don't memorize tickers) prospectus explains:

“Purchase Fees
The Fund charges a purchase fee of 0.25% on all share purchases, including shares purchased by exchange from another Vanguard fund. Unlike a sales charge or a load paid to a broker or a fund management company, the purchase fee is paid directly to the Fund to offset the costs of buying securities.”

This means the fee goes into the fund, increasing the net assets. Vanguard funds that have a purchase fee are generally those whose securities are illiquid and have high transaction costs. Municipal bonds are in that category. There is no way to charge a purchase fee on an ETF.
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masonstone
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Re: Why does VTEAX have a purchase fee?

Post by masonstone »

Geologist wrote: Fri Feb 21, 2020 10:15 pm I’m not sure what you mean by “making extra cash for them.”

As the Vanguard Tax-Exempt Bond Index Fund (it is better to give the fund name as well as the ticker because most people on this discussion board don't memorize tickers) prospectus explains:

“Purchase Fees
The Fund charges a purchase fee of 0.25% on all share purchases, including shares purchased by exchange from another Vanguard fund. Unlike a sales charge or a load paid to a broker or a fund management company, the purchase fee is paid directly to the Fund to offset the costs of buying securities.”

This means the fee goes into the fund, increasing the net assets. Vanguard funds that have a purchase fee are generally those whose securities are illiquid and have high transaction costs. Municipal bonds are in that category. There is no way to charge a purchase fee on an ETF.
So in this case is it more beneficial to purchase the ETF from Vanguard as opposed to the mutual fund since there is no purchase fee?
Northern Flicker
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Re: Why does VTEAX have a purchase fee?

Post by Northern Flicker »

First, you buy the ETF shares on an exchange just like buying a stock, not directly from Vanguard.

Second, I would use the ETF shares to avoid a 0.25% purchase fee, but that is not an exorbitant fee. There are many mutual funds with expense ratios at or exceeding that level, meaning you are paying that amount annually instead of as a one-time fee. Still, the transaction costs associated with the ETF should be lower than the purchase fee, so it would be the preferred approach unless you have a strong preference for mutual fund shares.
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masonstone
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Re: Why does VTEAX have a purchase fee?

Post by masonstone »

Northern Flicker wrote: Sat Feb 22, 2020 12:38 am First, you buy the ETF shares on an exchange just like buying a stock, not directly from Vanguard.

Second, I would use the ETF shares to avoid a 0.25% purchase fee, but that is not an exorbitant fee. There are many mutual funds with expense ratios at or exceeding that level, meaning you are paying that amount annually instead of as a one-time fee. Still, the transaction costs associated with the ETF should be lower than the purchase fee, so it would be the preferred approach unless you have a strong preference for mutual fund shares.
Considering theyre the same thing why would someone prefer the mutual fund shares?
AlohaJoe
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Re: Why does VTEAX have a purchase fee?

Post by AlohaJoe »

masonstone wrote: Fri Feb 21, 2020 8:36 pm Why does VTEAX have a purchase fee even if purchased on Vanguard.com?
It says why in the prospectus. Read the section on Frequent Trading or Market Timing.
GrowthSeeker wrote: Fri Feb 21, 2020 8:45 pm Good question, because the corresponding ETF does not (VTEB)
People trading an ETF don't generate any costs for other holders of the ETF. The same is not true of mutual funds. Which is exactly what Vanguard says in the prospectus. (I feel like I'm repeating myself.)
These policies and procedures do not apply to ETF Shares because frequent trading in ETF Shares generally does not disrupt portfolio management or otherwise harm fund shareholders.
Geologist
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Re: Why does VTEAX have a purchase fee?

Post by Geologist »

masonstone wrote: Fri Feb 21, 2020 11:03 pm
Geologist wrote: Fri Feb 21, 2020 10:15 pm I’m not sure what you mean by “making extra cash for them.”

As the Vanguard Tax-Exempt Bond Index Fund (it is better to give the fund name as well as the ticker because most people on this discussion board don't memorize tickers) prospectus explains:

“Purchase Fees
The Fund charges a purchase fee of 0.25% on all share purchases, including shares purchased by exchange from another Vanguard fund. Unlike a sales charge or a load paid to a broker or a fund management company, the purchase fee is paid directly to the Fund to offset the costs of buying securities.”

This means the fee goes into the fund, increasing the net assets. Vanguard funds that have a purchase fee are generally those whose securities are illiquid and have high transaction costs. Municipal bonds are in that category. There is no way to charge a purchase fee on an ETF.
So in this case is it more beneficial to purchase the ETF from Vanguard as opposed to the mutual fund since there is no purchase fee?
If you want to avoid the purchase fee, you could buy the older Intermediate-Term Tax-Exempt Fund (VWITX/VWIUX). This isn’t an index fund, but has nearly the same characteristics. For Investor Shares (accounts less than $50,000), it has a higher expense ratio, but the dollar difference in expenses wouldn’t be great (~$36/year on a $45,000 account, less on smaller accounts). For Admiral Shares, the expense ratio is the same.
alex_686
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Re: Why does VTEAX have a purchase fee?

Post by alex_686 »

Note, on the ETFs. You are not buying the ETFs from Vanguard. You are buying shares that already exist in the secondary market.

Now, if you are creating or redeeming shares (that is, adjusting the shares being traded on the secondary market) with Vanguard, that is a different issue. Now you have to pay.

You can see this in the bid-ask spread and NAV spread during intraday trading.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
masonstone
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Re: Why does VTEAX have a purchase fee?

Post by masonstone »

alex_686 wrote: Sat Feb 22, 2020 7:29 am Note, on the ETFs. You are not buying the ETFs from Vanguard. You are buying shares that already exist in the secondary market.

Now, if you are creating or redeeming shares (that is, adjusting the shares being traded on the secondary market) with Vanguard, that is a different issue. Now you have to pay.

You can see this in the bid-ask spread and NAV spread during intraday trading.
Is there any advantage to having a mutual fund of a fund than the ETF of the same Vanguard fund?
alex_686
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Re: Why does VTEAX have a purchase fee?

Post by alex_686 »

masonstone wrote: Sat Feb 22, 2020 9:33 am Is there any advantage to having a mutual fund of a fund than the ETF of the same Vanguard fund?
Often debated topic here. Lots if fury over rather minor points. ETFs are the future. I hold both, while slightly favoring ETFs. In taxable they are the clear winner.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
masonstone
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Re: Why does VTEAX have a purchase fee?

Post by masonstone »

In this setting why would anyone purchase the mutual fund if there is a purchase fee where in the ETF there isn't?

The only advantage I see in the mutual fund is the bid/ask spread. I still don't understand what that means for index funds?
alex_686
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Re: Why does VTEAX have a purchase fee?

Post by alex_686 »

masonstone wrote: Sat Feb 22, 2020 10:59 am In this setting why would anyone purchase the mutual fund if there is a purchase fee where in the ETF there isn't?

The only advantage I see in the mutual fund is the bid/ask spread. I still don't understand what that means for index funds?
It means you might be paying the purchase fee indirectly via the wider spreads. Maybe.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
UpperNwGuy
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Re: Why does VTEAX have a purchase fee?

Post by UpperNwGuy »

I don't like ETFs, so I didn't want to buy VTEB. I don't like purchase fees, so I didn't want to buy VTEAX. Instead I bought Vanguard Intermediate-Term Tax-Exempt Fund (VWITX), and I've been extremely happy with this mutual fund.
Topic Author
masonstone
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Re: Why does VTEAX have a purchase fee?

Post by masonstone »

UpperNwGuy wrote: Sat Feb 22, 2020 11:44 am I don't like ETFs, so I didn't want to buy VTEB. I don't like purchase fees, so I didn't want to buy VTEAX. Instead I bought Vanguard Intermediate-Term Tax-Exempt Fund (VWITX), and I've been extremely happy with this mutual fund.
Why don't you like ETFs?
joeschmo
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Re: Why does VTEAX have a purchase fee?

Post by joeschmo »

Note that the credit quality distribution is worse on VTEAX/VTEB than eg VWIUX, which is basically all AA+. Even Vanguard PAS doesn’t recommend VTEAX/VTEB but rather 30/40/30 mix of short/interm/long munis.
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Re: Why does VTEAX have a purchase fee?

Post by whodidntante »

Puretaxableindexer wrote: Fri Feb 21, 2020 9:58 pm I never understood the reason Vanguard has "purchase fees" for funds. I believe I have a couple of Vanguard funds that charge them.
Anyone have any idea why? Other than making extra cash for them.
Except for a modest cash buffer, a mutual fund has to trade to invest money or to meet redemptions. This costs the fund money. The costs are not just direct fees, but also losses due to the spread which are significant for some securities. It's reasonable to ask those who are triggering the costs to pay them.

ETFs have an advantage in this regard since the fund does not have to trade to invest money or to meet redemptions. Altruism is in short supply in the capital markets though, so it's really the ETF buyer who pays on average. It does mean that the ETF manager can responsibly run a thinner cash margin, however. And this is a structural advantage of ETFs.
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Re: Why does VTEAX have a purchase fee?

Post by ruud »

UpperNwGuy wrote: Sat Feb 22, 2020 11:44 am I don't like ETFs, so I didn't want to buy VTEB. I don't like purchase fees, so I didn't want to buy VTEAX. Instead I bought Vanguard Intermediate-Term Tax-Exempt Fund (VWITX), and I've been extremely happy with this mutual fund.
The difference in expense ratio between VTEAX and VWITX is 0.08%, so in about three years you'll have paid more in expenses than the purchase fee would have been (unless you convert to the Admiral shares VWIUX somewhere along the way).
.
Puretaxableindexer
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Re: Why does VTEAX have a purchase fee?

Post by Puretaxableindexer »

whodidntante wrote: Sat Feb 22, 2020 12:35 pm
Puretaxableindexer wrote: Fri Feb 21, 2020 9:58 pm I never understood the reason Vanguard has "purchase fees" for funds. I believe I have a couple of Vanguard funds that charge them.
Anyone have any idea why? Other than making extra cash for them.
Except for a modest cash buffer, a mutual fund has to trade to invest money or to meet redemptions. This costs the fund money. The costs are not just direct fees, but also losses due to the spread which are significant for some securities. It's reasonable to ask those who are triggering the costs to pay them.

ETFs have an advantage in this regard since the fund does not have to trade to invest money or to meet redemptions. Altruism is in short supply in the capital markets though, so it's really the ETF buyer who pays on average. It does mean that the ETF manager can responsibly run a thinner cash margin, however. And this is a structural advantage of ETFs.
Thanks for the explanation.
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Re: Why does VTEAX have a purchase fee?

Post by ruud »

joeschmo wrote: Sat Feb 22, 2020 12:19 pm Note that the credit quality distribution is worse on VTEAX/VTEB than eg VWIUX, which is basically all AA+. Even Vanguard PAS doesn’t recommend VTEAX/VTEB but rather 30/40/30 mix of short/interm/long munis.
Doesn't seem so different to me:

Code: Select all

            VTEAX   VWIUX
AAA         22.1%   21.5%
AA          55.0%   49.7%
A           16.0%   20.1%
BBB          6.4%    6.5%
BB                   0.6%
B or lower           0.1%
NR           0.5%    1.5%
Source: VTEAX VWIUX.
.
alex_686
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Re: Why does VTEAX have a purchase fee?

Post by alex_686 »

Puretaxableindexer wrote: Sat Feb 22, 2020 12:43 pm
whodidntante wrote: Sat Feb 22, 2020 12:35 pm
Puretaxableindexer wrote: Fri Feb 21, 2020 9:58 pm I never understood the reason Vanguard has "purchase fees" for funds. I believe I have a couple of Vanguard funds that charge them.
Anyone have any idea why? Other than making extra cash for them.
Except for a modest cash buffer, a mutual fund has to trade to invest money or to meet redemptions. This costs the fund money. The costs are not just direct fees, but also losses due to the spread which are significant for some securities. It's reasonable to ask those who are triggering the costs to pay them.

ETFs have an advantage in this regard since the fund does not have to trade to invest money or to meet redemptions. Altruism is in short supply in the capital markets though, so it's really the ETF buyer who pays on average. It does mean that the ETF manager can responsibly run a thinner cash margin, however. And this is a structural advantage of ETFs.
Thanks for the explanation.
To extend this abit, the mutual fund has to pay the cost of creating & redeeming shares - both explicit and implicit (i.e. the low liquidity with these bonds.) on the other hand, it is the Authorized Participants (the people who create and redeeming ETF shares) who pay the cost.

When you buy a ETF you probably are not buying from a AP, but they are there somewhere in the chain that is pricing your ETF. So that implicit illiquidity cost is one of the things that ate indirectly affecting the spreads.

Yes, this is a crooked road.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
UpperNwGuy
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Re: Why does VTEAX have a purchase fee?

Post by UpperNwGuy »

ruud wrote: Sat Feb 22, 2020 12:40 pm
UpperNwGuy wrote: Sat Feb 22, 2020 11:44 am I don't like ETFs, so I didn't want to buy VTEB. I don't like purchase fees, so I didn't want to buy VTEAX. Instead I bought Vanguard Intermediate-Term Tax-Exempt Fund (VWITX), and I've been extremely happy with this mutual fund.
The difference in expense ratio between VTEAX and VWITX is 0.08%, so in about three years you'll have paid more in expenses than the purchase fee would have been (unless you convert to the Admiral shares VWIUX somewhere along the way).
I plan to convert my VWITX Investor Shares to VWIUX Admiral Shares later this year.
UpperNwGuy
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Re: Why does VTEAX have a purchase fee?

Post by UpperNwGuy »

masonstone wrote: Sat Feb 22, 2020 12:10 pm
UpperNwGuy wrote: Sat Feb 22, 2020 11:44 am I don't like ETFs, so I didn't want to buy VTEB. I don't like purchase fees, so I didn't want to buy VTEAX. Instead I bought Vanguard Intermediate-Term Tax-Exempt Fund (VWITX), and I've been extremely happy with this mutual fund.
Why don't you like ETFs?
All the usual reasons:
— prefer to trade early in the morning before the market opens
— prefer to invest exact sums of money rather than buy a fixed number of shares
— prefer to trade at end-of-day NAV rather than at ever-changing mid-day prices
— dislike putting together market orders, limit orders, stop orders, etc.
joeschmo
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Re: Why does VTEAX have a purchase fee?

Post by joeschmo »

ruud wrote: Sat Feb 22, 2020 12:51 pm
joeschmo wrote: Sat Feb 22, 2020 12:19 pm Note that the credit quality distribution is worse on VTEAX/VTEB than eg VWIUX, which is basically all AA+. Even Vanguard PAS doesn’t recommend VTEAX/VTEB but rather 30/40/30 mix of short/interm/long munis.
Doesn't seem so different to me:

Code: Select all

            VTEAX   VWIUX
AAA         22.1%   21.5%
AA          55.0%   49.7%
A           16.0%   20.1%
BBB          6.4%    6.5%
BB                   0.6%
B or lower           0.1%
NR           0.5%    1.5%
Source: VTEAX VWIUX.
Weird, must have been comparing with something else. Too bad I just bought a ton of VWIUX; seems like VTEB is a bit better quality. I was trying to avoid long maturity though...
Northern Flicker
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Re: Why does VTEAX have a purchase fee?

Post by Northern Flicker »

masonstone wrote: Sat Feb 22, 2020 4:59 am
Northern Flicker wrote: Sat Feb 22, 2020 12:38 am First, you buy the ETF shares on an exchange just like buying a stock, not directly from Vanguard.

Second, I would use the ETF shares to avoid a 0.25% purchase fee, but that is not an exorbitant fee. There are many mutual funds with expense ratios at or exceeding that level, meaning you are paying that amount annually instead of as a one-time fee. Still, the transaction costs associated with the ETF should be lower than the purchase fee, so it would be the preferred approach unless you have a strong preference for mutual fund shares.
Considering theyre the same thing why would someone prefer the mutual fund shares?
Mutual funds are easier for the investor to manage. Once the fund holds more assets, the purchase fee will likely be eliminated. That was how it played out with the short-term TIPS index fund VTIPX/VTAPX/VTIP.
Last edited by Northern Flicker on Sun Feb 23, 2020 2:16 pm, edited 1 time in total.
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Scooter57
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Re: Why does VTEAX have a purchase fee?

Post by Scooter57 »

Why take any risk for a SEC yield of 1.34%? Vanguard Total Bond Market's SEC yield is 2.10%. That is much better than the tax ewuvalent yield of VTEAX for most people. You can still get CDs with rates in the 2%s and no risk, too and come out ahead after taxes.

Muni funds were attractive a year ago when the Feds started raising rates, and I loaded up with them then, but they have been bid up recently to where theit rates even with the tax advantage are ludicrously low. You will still pay state taxes on most of the interest on VTEAX so unless you make a huge annual income you really get no benefit right now from the tax exempt feature.
rkhusky
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Re: Why does VTEAX have a purchase fee?

Post by rkhusky »

What’s the average bid/ask spread for the ETF?
Lyrrad
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Re: Why does VTEAX have a purchase fee?

Post by Lyrrad »

rkhusky wrote: Sat Feb 22, 2020 4:33 pm What’s the average bid/ask spread for the ETF?
Vanguard usually posts a summary of the bid-ask spread on their site here: https://advisors.vanguard.com/VGApp/iip ... daskspread. However, it's been broken for me for a few weeks.

You can view the 30-day bid-ask spread on the individual ETF pages on their Advisors site:
https://advisors.vanguard.com/investmen ... t-bond-etf

Here, the spread is $0.01, or 0.02%.

Note that the ETF may trade at a premium or discount to NAV, so one may lose or gain a few basis points because of this.

Vanguard did claim last month that over 95% of Vanguard ETF orders on their platform had no spread cost.
alex_686
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Re: Why does VTEAX have a purchase fee?

Post by alex_686 »

Lyrrad wrote: Sat Feb 22, 2020 5:32 pm Vanguard did claim last month that over 95% of Vanguard ETF orders on their platform had no spread cost.
That is deceptive. It shares traded on their platform, not Vanguard shares traded. And its a metric that is easy to game.
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robertalpert
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Re: Why does VTEAX have a purchase fee?

Post by robertalpert »

I noticed today that VTEAX no longer has a purchase fee.
And the ETF VTEB expense ratio has been lowered to 0.06 as compared to ER of 0.09 for VTEAX.

What to do????

I'm waiting till next week, then consider purchasing VTEAX to replace my VMLUX holdings.
YearTrader
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Re: Why does VTEAX have a purchase fee?

Post by YearTrader »

robertalpert wrote: Thu Feb 27, 2020 12:48 pm I noticed today that VTEAX no longer has a purchase fee.
And the ETF VTEB expense ratio has been lowered to 0.06 as compared to ER of 0.09 for VTEAX.

What to do????

I'm waiting till next week, then consider purchasing VTEAX to replace my VMLUX holdings.
Vanguard must have been watching this thread :wink:.
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