Vanguard 2011 brokerage commission expense

Mutual funds that buy and sell stock incur brokerage commissions on these transactions. This transactional cost is not included in a fund's expense ratio, but the cost is reported in a fund's annual Statement of Additional Information to the fund prospectus. Additional fund transactions costs, such as spread costs and market impact costs can be much higher than brokerage expense, but these costs are not reported and must be estimated.

Brokerage commission expense
The tables below provide Vanguard passive and active fund brokerage expense for 2011, both in absolute dollars and as a "commission ratio" (brokerage commission divided by average net assets). The tables are divided among index and passive tax-managed stock funds and actively managed stock funds. In 2011 passive fund's brokerage expense averaged .01% (range: nil to .03%), compared to active expense of 0.11% (range .01% to 0.97%).

Balanced funds and fund of funds
Balanced mutual funds which buy and sell individual stocks pay brokerage commissions on the stock portion of the portfolio. A fund of funds does not ordinarily pay brokerage commissions on its buys and sells of the underlying mutual fund portfolios; but a fund of funds does incur brokerage expense for its purchases or sales of an ETF. In 2011 the Vanguard Target Retirement funds incurred brokerage commission expense for ETF transactions. . Balanced fund commission expense in 2011 was very low (ranging from nil to .022%). Keep in mind that a fund of funds will also bear the commission brokerage costs of the underlying portfolios.

Vanguard fund of funds include the series of Lifestrategy Funds; the series of Target Retirement Funds; the series of Managed Payout funds; and the STAR fund. The majority of Vanguard balanced funds are indexed, or mostly indexed. Active balanced funds include the STAR, Wellesley, and Wellington funds.

Factors determining brokerage expense
Vanguard provides notes in the statement of additional information that attribute reasons behind higher and lower levels of brokerage expense for a given fund[/s]. Factors can include:
 * An increase or decrease in fund turnover;
 * An increase in shareholder flows into or out of the portfolio;
 * An increase or decrease in market volatility.

A new fund, with low net assets, will often have a higher than average "commission ratio" than similar funds with higher asset bases.