Mutual funds that buy and sell stock incur costs on these transactions. These transactional costs are not included in a fund’s expense ratio. Transaction costs include brokerage commission expense, buy and sell spread costs, and market impact costs, Among these costs, only brokerage commission costs are reported. These costs are recorded in the Statement of Additional Information section of the fund prospectus. We can take this expense and divide it into a fund’s average net assets to produce a commission expense ratio, analogous to a fund’s reported expense ratio. This blog entry will examine the brokerage commission expense of Vanguard active and passive funds from 1994 to 2014.
Factors affecting brokerage expense
Factors behind higher and lower levels of brokerage expense for a given fund include:
- An increase or decrease in fund turnover; this can be due to a change in an active adviser’s trading strategy, or an index fund changing the benchmark index that the fund is designed to track.
- 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.
Vanguard active and passive funds brokerage commission expense
The chart shows the average brokerage commission expense for Vanguard active and passive funds over the 1994 – 2014 period. As can be seen, brokerage expense ratios have declined over this period. Growing fund asset bases are one reason for the decline, as well as the advent of lower cost electronic stock exchanges over the period.
In general, brokerage commission expense is marginally higher for U.S. small cap, U.S. mid cap, and international funds than for funds investing in U.S. large cap stocks.
The data sources come from SEC filings of fund data (the fund prospectus for brokerage commission data and NSAR reports for average net assets). The SEC filings report brokerage commission data on aggregate funds for some fund groups in early nineteen ninety fund prospectuses. In the spreadsheets, these aggregate numbers are color-coded.
Data spreadsheets, with more complete data: