Fees in a "Fund of Funds"

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danielc
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Fees in a "Fund of Funds"

Post by danielc » Tue Dec 03, 2019 1:02 am

Consider a "fund of funds" like Vanguard LifeStrategy Growth (VASGX). It advertises an ER of 0.14%, but this fund invests in four Vanguard funds, each of which has its own ER of around which themselves average around 0.14%. So I'm wondering whether the 0.14% of VASGX is just reporting the weighted average of the fees of its individual components or whether it's an additional 0.14% on top of the rest.

Does anybody know?

EDIT: For BNDW the reported ER is higher than the weighted average of its constituents.
Last edited by danielc on Tue Dec 03, 2019 1:08 am, edited 1 time in total.

MotoTrojan
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Re: Fees in a "Fund of Funds"

Post by MotoTrojan » Tue Dec 03, 2019 1:08 am

That is the entire extent of expenses in this case, but always worth asking since some companies are not so honest.

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JoMoney
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Re: Fees in a "Fund of Funds"

Post by JoMoney » Tue Dec 03, 2019 1:29 am

From the SAI of the fund (linked with the prospectus at the link you posted)
https://personal.vanguard.com/pub/Pdf/s ... 2210158492
...
Vanguard LifeStrategy Funds and Vanguard STAR Fund Only.
The Agreement provides that the Funds will not contribute to Vanguard’s capitalization or pay for corporate management, administrative, and distribution services provided by Vanguard. However, each Fund will bear its own direct expenses, such as legal, auditing, and custodial fees. In addition, the Agreement further provides that the Funds’ direct expenses will be offset, in whole or in part, by a reimbursement from Vanguard for (1) the Funds’ contributions to the cost of operating the underlying Vanguard funds in which the Funds invest, and (2) certain savings in administrative and marketing costs that Vanguard expects to derive from the Funds’ operations. The Funds expect that the reimbursements should be sufficient to offset most or all of the direct expenses incurred by each Fund. Therefore, the Funds are expected to operate at a very low—or zero—direct expense ratio. Of course, there is no guarantee that this will always be the case. Although the Funds are not expected to incur any net expenses directly, the Funds’ shareholders indirectly bear the expenses of the underlying Vanguard funds...
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grabiner
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Re: Fees in a "Fund of Funds"

Post by grabiner » Tue Dec 03, 2019 11:39 pm

The way to check this is to look in the prospectus for "acquired fund fees and expenses". This is the fee of the underlying funds. At Vanguard, the entire expense is the expense of the underlying funds. Some other fund companies charge an extra fee for the fund-of-funds, which appears as a separate "management fee" or "other expense" in the prospectus.

Even at Vanguard, you lose a bit from the funds-of-funds, because they hold the Investor shares of the underlying funds, and thus you lose the benefit of Admiral shares. A four-fund portfolio of Admiral shares matching a LifeStrategy or Target Retirement fund would have 0.08% expenses.
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FiveK
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Re: Fees in a "Fund of Funds"

Post by FiveK » Wed Dec 04, 2019 12:27 am

danielc wrote:
Tue Dec 03, 2019 1:02 am
EDIT: For BNDW the reported ER is higher than the weighted average of its constituents.
grabiner wrote:
Tue Dec 03, 2019 11:39 pm
At Vanguard, the entire expense is the expense of the underlying funds.
From https://investor.vanguard.com/etf/profile/BNDW (Vanguard Total World Bond ETF):
Expense ratio as of 12/21/2018 = 0.09%
Allocation to underlying funds as of 10/31/2019
Vanguard Total International Bond ETF 51.20%
Vanguard Total Bond Market ETF 48.80%

From https://investor.vanguard.com/etf/profile/BNDX (Vanguard Total International Bond ETF):
Expense ratio as of 02/26/2019 = 0.09%

From https://investor.vanguard.com/etf/profile/BND (Vanguard Total Bond Market ETF):
Expense ratio as of 04/26/2019 = 0.035%

Based on other Vanguard funds of funds (just as grabiner stated) I would have expected the weighted average expense ratio of the underlying funds to equal the BNDW ETF of ETFs. Many possibilities as to why the numbers above don't show that, but does anyone know the actual reason?

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Re: Fees in a "Fund of Funds"

Post by danielc » Wed Dec 04, 2019 1:16 am

Thanks for the help! Though I'm still wondering why BNDW has a higher ER than the weighted average of its components. I wonder where the extra cost is coming from.

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Nate79
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Re: Fees in a "Fund of Funds"

Post by Nate79 » Wed Dec 04, 2019 1:27 am

According to the annual report issued 8/31/2019 the expenses of the fund are only the weighted average of the underlying holdings and was 0.06% annualized. Perhaps Vanguard hasn't updated the ER on their website.

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