Purchase fee

Purchase fees are charged by a few Vanguard funds which trade stocks with high trading costs. Unlike loads or commissions charged by brokers, these fees are paid back to the fund, and thus work to the benefit of fundholders by ensuring that the trading costs caused by shorter-term traders do not reduce the fund value for longer-term investors.

If a fund invests $1,000,000 in emerging markets or international small-cap stocks, it may lose a significant amount in commissions, bid/ask spreads, and market impact, and might wind up with only $980,000 worth of stock. If the fund charges a 2% purchase fee, then existing investors are not affected by this purchase, and the new investors who invested the $1,000,000 have $980,000 worth of shares, which is all the fund received. If the fund is an index fund, this arrangement of the charge helps the fund track the index.

Many funds with purchase fees also charge redemption fees for the same reason; if the fund needs to sell more stocks than it buys, it will incur costs in selling the stocks.

Purchase fees usually decrease as the fund gets larger, and sometimes go away entirely; while trading does not become less expensive, the trading costs only apply to net purchases. If the fund receives $1,000,000 in sale orders and $2,000,000 in purchase orders, it need only invest $1,000,000 in stock, and the $20,000 lost to trading costs is only 1% of the purchases, which would make a 1% fee a fair charge. If the fund receives equal amounts in sale and purchase orders, then there is no cost.

Vanguard does not charge a purchase fee on reinvested distributions, because it does not need to purchase any securities to reinvest the distributions. Therefore, you may want to reinvest distributions in a fund which charges a purchase fee.

You can avoid paying a purchase fee by using an ETF. You will still pay a fee to purchase the fund, as ETFs are purchased in a brokerage account, and you will pay a commission, bid-ask spread, and possibly a market impact cost of your own if the ETF has a low trading volume. Compare the costs of the mutual fund and ETF, including the expense difference; most ETFs have lower costs than Investor shares of the fund but about the same cost as Admiral shares. Therefore, it is often worthwhile to buy an ETF in order to avoid the purchase fees unless you expect to have Admiral shares soon.

The following Vanguard funds charge purchase fees:
 * Vanguard FTSE All-World ex-US Small-Cap Index Fund (0.75%, also 0.75% redemption fee)
 * Vanguard Global ex-US Real Estate Fund (0.25%; also 0.25% redemption fee)