The United States’ largest funds company, Vanguard Group, which manages, more than $1.95 trillion in index mutual fund assets and exchange traded funds under the Vanguard 500 Index Inv (MUTF:VFINX), is seeking to cut down on licensing fees for 22 of its index mutual funds, with a value of about $500 billion, a quarter of the total assets under management.
The company said today that it had successfully, negotiated lower-cost index licensing deals, in a bid to woo cost-conscious investors. The deals ill results in 22 of its index funds switching to new benchmarks, and consequently, adjusting the stocks they invest in accordingly, noted Washington Post. The end results will see some significant fee reductions to investors in Vanguard Fund holdings.
The chief investment officer with Vanguard Holdings, based in Valley Forge, Pa, was quoted in a statement saying, “the new licensing deals will enable us to deliver significant value to our index fund and ETF shareholders and lower expense ratios over time”. On the other hand, John Woerth, a spokesman for Vanguard, a privately held company owned by its fund shareholders, connoted that it is impossible to determine when the intended fee cuts will take effect, or how much will be reduced from the current rates.
Index funds are run on a policy that tries to match the market, rather than focusing on outperforming the market, generally the overall value of an index is not evaluated on per asset basis, but rather as one pool of assets or bonds. In many cases, the pool will include both winning and losing assets, which then leverages to match the market performance.
Index fund managers are tasked with overseeing that the funds holding is exactly the same as the index it is mapped to track, for which, it pays the licensing fees, and should consequently, update it accordingly, in case of any additions or exits from the index. Sauter added, “index licensing fees have represented a growing portion of the expenses that investors pay to own index funds and ETFs,” this is one of the major reasons the company is negotiating on lower-cost licensing index funds, which would then be replicated to investors.
The group founder, John Bogle, was, earlier this year, in February, quoted criticizing the level of tax levied on private equity firms, and other forms of capital gains, as compared to the high rates charged on real income to the typical citizens who sweat for their cash. He also mentioned taxes on transaction fees, which he feels are quite low, and insignificant. Nonetheless, he was very categorical to make sure that his kind of business is not replicated in the class, which he deemed as capital gain earners, by focusing his attention on the short term speculators (gamblers).
Some of the 22 funds range from MSCI US Broad Market Index, a diversified index of U.S. stocks, to the MSCI Emerging Markets Index, covering stocks of fast-growing countries, such as China, India, and Brazil, noted the report. It is believed that 16 of the funds to be trading under new benchmarks exclusively invest in U.S stocks, and will track the new benchmarks from the University of Chicago Center for research in Security Prices.
The other 6 funds, of the 22 will be moved to Indexes from FTSE Group, of the U.K, and Sauter, earmarked, that the indexes that Vanguard will use, “are well-constructed, and offer comprehensive coverage of their respective markets, and meet Vanguard’s ‘best practice’ standards for market benchmarks”.