Stock market mutual funds incur the costs of making transactions in the market place. These costs are in addition to the costs of managing the fund.
Transaction costs include brokerage commission expense, bid and ask spreads, and market impact costs.
Brokerage commission costs are reported in a mutual fund’s statement of additional information, which is a separate part of a fund’s annual prospectus.
If we take a fund’s commission expense and divide it into a fund’s average net assets (reported in each fund’s NSAR filing with the SEC EDGAR database) we can calculate a “commission ratio” percentage analogous to a fund’s expense ratio.
Vanguard mutual fund brokerage commission expense
The tables below provide commission ratios for Vanguard passively managed stock funds and for the firm’s actively managed funds.
According to Vanguard’s notes on commission expense, changes in a fund’s commission expense is primarily due to a number of potential factors:
- A change in investor flows into or out of the fund:
- An increase or decrease in the volatility of investor flows:
- An increase or decrease in market volatility:
- An increase or decrease in a fund’s turnover of stocks:
- A change in investment management that results in lower commission expense.
Vanguard passive funds
For US stock indexes, funds formerly benchmarked to MSCI indexes were switched to CRSP indexes. For international stock indexes, funds formerly benchmarked to MSCI indexes were switched to FTSE indexes.
In most instances, the increase in commission expense left commission ratios of less than one basis point for many funds, and resulted in an average expense of just .01%.
The trend (see chart above) is for a reduction in the commission ratio over time.
This trend may result from the following factors:
- Cross trading: When a stock migrates from one market segment to another (for example a small cap stock moves to a mid cap index and a mid cap stock moves to a small cap index), the funds will simply trade the stocks between the two index funds and bypass trading on the market.
- Exchange-traded shares: Most of the funds have exchange-traded shares. Individual ETF shareholders buying and selling shares does not result in the buying or selling of stock in the fund portfolio. Institutional creation and redemption of ETF shares is done with in-kind stock transactions that reduce the buying and selling of shares by the fund. (see note below.)
- Economy of scale: As a fund grows in size, its commission ratio will drop if the rate of asset growth exceeds the growth in commission expense.
Vanguard passive mutual fund brokerage commission expense in 2013
|Vanguard Total Stock Market Index||258,511,762,000||$5,089,000||0.00%|
|Vanguard 500 Index||139,669,800,000||$1,008,000||0.00%|
|Vanguard Large-Cap Index||7,242,240,000||$58,000||0.00%|
|Vanguard FTSE Social Index||709,389,000||$17,000||0.00%|
|Vanguard Growth Index||31,797,003,000||$830,000||0.00%|
|Vanguard Value Index||24,169,359,000||$391,000||0.00%|
|Vanguard High Yield Dividend Index||7,883,999,000||$204,000||0.00%|
|Vanguard Dividend Appreciation Index||19,994,196,000||$128,000||0.00%|
|Vanguard Extended Market Index||30,281,928,000||$1,303,000||0.00%|
|Vanguard Mid-Cap Index||39,626,457,000||$2,370,000||0.01%|
|Vanguard Mid-Cap Growth Index||3,559,666,000||$207,000||0.01%|
|Vanguard Mid-Cap Value Index||3,366,745,000||$233,000||0.01%|
|Vanguard Small-Cap Index||36,219,525,000||$4,451,000||0.01%|
|Vanguard Small-Cap Growth Index||12,445,390,000||$1,816,000||0.01%|
|Vanguard Small-Cap Value Index||10,181,514,000||$1,349,000||0.01%|
|Vanguard REIT Index||34,451,690,000||$1,723,000||0.01%|
|Vanguard European Stock Index||11,317,475,000||$674,000||0.01%|
|Vanguard Pacific Stock Index||4,642,176,000||$378,000||0.01%|
|Vanguard Emerging Markets Stock Index||70,626,249,000||$17,176,000||0.02%|
|Vanguard FTSE All-World ex-US Index||16,953,543,000||$685,000||0.00%|
|Vanguard FTSE All-World ex-US Small Cap Index||1,630,767,000||$115,000||0.01%|
|Vanguard Total International Stock Index||91,041,467,000||$8,716,000||0.01%|
|Vanguard Developed Market Index||16,540,178,000||$1,108,000||0.01%|
|Vanguard Total World Stock Index||3,167,477,000||$181,000||0.01%|
|Vanguard Global ex-US Real Estate||1,031,520,000||$138,000||0.01%|
|Vanguard Tax-Managed Capital Appreciation||4,780,340,000||$61,000||0.00%|
|Vanguard Tax-Managed Small-Cap||2,822,438,000||$241,000||0.01%|
Vanguard active funds
Vanguard active funds brokerage commission expense for fiscal year 2013 measured .06%.
The commission ratio for international stock funds was higher than for domestic stock funds, measuring 0.11% compared to 0.05%.
This difference is consistent with Morningstar studies of commission expense. Note that Vanguard active funds commission expense is lower than the average fund.
Vanguard active stock fund brokerage commission expense
|Vanguard Dividend Growth||16,307,078,000||$2,410,000||0.01%|
|Vanguard Equity Income||11,504,995,000||$2,331,000||0.02%|
|Vanguard Growth & Income||4,649,537,000||$912,000||0.02%|
|Vanguard PRIMECAP Core||5,157,686,000||$850,000||0.02%|
|Vanguard US Growth||4,050,883,000||$1,079,000||0.03%|
|Vanguard US Value||737,398,000||$133,000||0.02%|
|Vanguard Windsor II||41,246,998,000||$14,842,000||0.04%|
|Vanguard Capital Opportunity||8,740,570,000||$1,506,000||0.02%|
|Vanguard Capital Value||911,957,000||$1,796,000||0.20%|
|Vanguard Mid Cap Growth||2,502,206,000||$3,665,000||0.15%|
|Vanguard Selected Value||5,387,479,000||$3,665,000||0.07%|
|Vanguard Strategic Equity||3,697,655,000||$651,000||0.02%|
|Vanguard Explorer Value||165,177,000||$263,000||0.16%|
|Vanguard Strategic Small Cap||303,557,000||$86,000||0.03%|
|Vanguard Health Care||29,501,208,000||$5,310,000||0.02%|
|Vanguard Precious Metals & Mining||2,510,472,000||$1,663,000||0.07%|
|Vanguard Emerging Markets Select||174,141,000||$334,000||0.19%|
|Vanguard International Explorer||1,978,888,000||$2,317,000||0.12%|
|Vanguard International Growth||18,541,176,000||$12,048,000||0.06%|
|Vanguard International Value||7,159,754,000||$6,773,000||0.09%|
|Vanguard Global Equity||4,178,623,000||$3,031,000||0.07%|
Keep in mind that spread costs and market impact are usually higher transaction costs than brokerage commissions. Unfortunately, these costs are not reported by mutual funds. These costs are estimated to equal or exceed a fund’s expense ratio.
Vanguard manages a number of index funds that issue exchange-traded shares and high minimum mutual fund shares (either $100,000 admiral shares or $5 million dollar institutional shares). These funds are dominated by exchange-traded shares.
These funds include Vanguard’s suites of S&P and Russell indexes. They also include the series of Mega stock indexes, which transitioned to CRSP indexes in 2013, as well as the series of sector index funds tracking MSCI sector indexes. The tables below show available 2013 data for these funds.
The S&P 500 value index reports commission expense of less than $1,000 for the year. The table lists this as $999.
A number of sector funds have unreported commission expense.
Vanguard ETF 2013 brokerage commission expense
|Vanguard S&P 500 Growth||118,326,000||$1,000||0.00%|
|Vanguard S&P 500 Value||83,216,000||$999||0.00%|
|Vanguard S&P 400||271,503,000||$5,000||0.00%|
|Vanguard S&P 400 Growth||164,646,000||$3,000||0.00%|
|Vanguard S&P 400 Value||56,348,000||$3,000||0.01%|
|Vanguard S&P 600||179,602,000||$6,000||0.00%|
|Vanguard S&P 600 Growth||18,408,000||$2,000||0.01%|
|Vanguard S&P 600 Value||21,399,000||$2,000||0.01%|
|Vanguard Russell 3000||337,081,000||$15,000||0.00%|
|Vanguard Russell 1000||707,334,000||$28,000||0.00%|
|Vanguard Russell 1000 Growth||909,761,000||$13,000||0.00%|
|Vanguard Russell 1000 Value||788,001,000||$17,000||0.00%|
|Vanguard Russell 2000||434,993,000||$34,000||0.01%|
|Vanguard Russell 2000 Growth||189,448,000||$18,000||0.01%|
|Vanguard Russell 2000 Value||62,503,000||$11,000||0.02%|
|Vanguard Mega Cap||803,902,000||$7,000||0.00%|
|Vanguard Mega Cap Growth||945,049,000||$29,000||0.00%|
|Vanguard Mega Cap Value||649,935,000||$1,000||0.00%|
|Average Commission Ratio||0.00%|
Vanguard sector ETF 2013 brokerage commission expense
|Vanguard Consumer Discretionary||759,207,000||–|
|Vanguard Consumer Staples||1,437,168,000||$25,000||0.00%|
|Vanguard Health Care||1,511,462,000||–|
|Vanguard Information Technology||2,957,498,000||$33,000||0.00%|
|Vanguard Telecommunication Services||534,765,000||$110,000||0.02%|
|Average Commission Ratio||0.01%|