Redemption fees are charged by some Vanguard funds (and non-Vanguard funds as well) to discourage short-term trading or to compensate long-term holders for the expenses caused by short-term trading. Unlike loads or commissions charged by brokers, these fees are paid back to the fund, and thus work to the benefit of fundholders.
Types of fees
Short-term trading fees
Vanguard no longer charges short-term trading fees on any of its funds; it used to impose 2% fees on international fund for selling shares held less than two months, and 1% fees on many aggressive and sector funds for selling shares held less than one year.
These fees were intended to discourage market timers from investing in the funds; high transaction costs might otherwise need to be passed on to shareholders. Vanguard now believes  that its right to reject disruptive transactions and its ban on selling and then buying the same fund online within 30 days are enough to protect long-term investors against trading costs.
Permanent redemption fees
A few funds which trade stocks with high trading costs charge a redemption fee on all shares sold, for the same reason that these funds and many other funds charge a purchase fee; selling stocks causes a significant cost to the fund, and the cost is charged to the investors who are responsible for it. The purchase and redemption fees tend to decrease as the fund becomes larger.
The following Vanguard funds charge permanent redemption fees:
- Vanguard Global ex-US Real Estate Fund] (0.25%, also 0.25% purchase fee)
This fund has an ETF class, which does not impose redemption fees because the fund does not incur any costs when an investor buys or sells an ETF on the stock market.
How Vanguard computes the fees
For funds with non-permanent redemption fees, shares purchased with reinvested distributions are exempt from the fee, and other shares are assumed to be sold on a first-in-first-out basis, even if you use a different accounting method for tax purposes. Therefore, once you have held the fund for longer than the fee period, you can usually rebalance or sell recently purchased shares for tax loss harvesting without paying a fee.
How to avoid the fees
If you are considering investing in a fund with a redemption fee for less than the fee period (for example, as a temporary replacement while tax loss harvesting), or with a permanent fee for a short time, use an ETF instead; the commissions and bid-ask spreads on buying and selling the ETF are likely to be less than the purchase and redemption fee.
If you would have to pay a fee to redeem a fund which has an ETF share class, you can avoid the fee by converting to ETF shares, and then selling the ETF on the stock market. Compare the cost of the conversion, and the commission and spread on the ETF sale, to the redemption fee.
If you are considering a fund with a permanent redemption fee as a long-term investment, you might ignore the potential fee, as the fee is likely to become much lower or go away by the time you actually sell your shares. However, you should also consider the ETF share class, particularly if you do not expect to reach Admiral shares in the fund (or the fund has no Admiral shares) and will thus have higher ongoing costs.