Vanguard Joins the Price War! Free VG ETF Trades and Cheap Equity Commissions

Wow! That is all I can say about the latest development. Vanguard just announced that its brokerage clients can now trade their entire 46 low-cost ETFs commission free! On top of that, they majorly slashed their equity commissions, which used to not be competitive with the rest of the market. Most commissions will be $7 or $2.

Here are the details:

New commission rates for ETFs and stocks 

Assets invested in Vanguard funds and ETFs

_________________
Commissions for Vanguard ETF transactions
_________________
Commissions for equity transactions

_______________
Less than $50,000
(standard rate)
Free $7 for the first 25 (subsequent trades $20)
$50,000–$500,000
(Voyager®)
Free $7
$500,000–$1 million
(Voyager Select®)
Free $2
$1 million or more
(Flagship®)
Free First 25 free
(subsequent trades $2)

Taken from https://personal.vanguard.com/us/insights/article/commissions-05042010

Vanguard CEO Bill McNabb explained:
For 35 years, Vanguard has been committed to reducing the cost of investing in mutual funds for our clients. Now, Vanguard is expanding our low-cost commitment to ETFs. Importantly, Vanguard offers a greater choice of ETFs with expense ratios that are among the lowest in the industry.

This Money article has more information and quotes. Yet again I need to update my Vanguard, Schwab, and Fidelity comparison post. This action is clearly in response to Schwab's and Fidelity's prior unveilings and it's great to see Vanguard attempt to remain competitive in all facets. Great news all around!

Note that there a few fine print issues that are important to note. First of all, it appears that the $50 fee for ETF conversion has been eliminated. Also note that "if you buy and sell the same Vanguard ETF in a Vanguard Brokerage account more than 25 times in a 12-month period, you may be restricted from purchasing that Vanguard ETF through your Vanguard Brokerage account for 60 days." Lastly, it appears that there is still a 1% redemption fee of up to $250 for selling non-Vanguard No-Transaction Fee funds held less than 180 days.

Update: DIY Investor brought up a good point in the comments section that I thought I'd add to this post. The free commissions may lead certain investors to increase their trading frequency tremendously, which, according to various behavioral economics studies, has proven to be overwhelmingly unsuccessful. McNabb addresses this point, further emphasizing Vanguard's underlying Jack Bogle approach to investing for the long-term:
To be clear, our commission-free offer is not intended to encourage the active trading of ETFs, which we believe is counterproductive and rarely successful.
Of course, that warning certainly won't convince all individuals. At least, Vanguard does have in the fine print that they reserve the right to restrict ETF purchases for those actively trading them above a certain threshold. This leads us to the one major concern of this announcement for investors that are disciplined, dollar-cost average indexers - since these transactions certainly do cost money and Vanguard is an "at-cost" provider, are they going to have to increase the expense ratios of their funds to compensate for those that excessively trade? Well, one could argue that the increased assets that will be poured in as a result will help to reduce costs and the economies of scales of the ETFs will reduce spreads and increase liquidity, making Vanguard ETFs even better. Rick Ferri, CFA, as quoted in the above linked article, suggests that Vanguard's patented structure of mutual funds/ETFs will make this commission free trading advantageous to Vanguard mutual fund holders as well. In any event, there certainly are a couple reasons for caution that will be interesting to monitor, but, in the end, I still see this as a very positive development for Vanguard customers.

5 comments:

  1. It is always good to see competition bring prices down as long as the quality remains the same.
    I have to admit that I am puzzled that the same thing hasn't occurred in money management where economies of scale are infinite - takes just as much work to manage $5 million as it does $2.5 million yet the fees are double for $5 million.
    It will be interesting to see if zero commissions increases trading activity which can be detrimental to investors.

    ReplyDelete
  2. You bring up some very good points. First of all, I agree wholeheartedly that for undisciplined investors, the ability to trade ETFs is potentially a fool's gold. Vanguard CEO explained: "To be clear, our commission-free offer is not intended to encourage the active trading of ETFs, which we believe is counterproductive and rarely successful." It appears that Vanguard has reserved the right to deny somebody purchases if they partake in excessive trading. There is no such restriction on buying and selling stocks in the VBS account and the reduced commissions there might also encourage more trading. That leads us to the one major concern of this announcement for investors that are disciplined, dollar-cost average indexers - since these transactions certainly do cost money and Vanguard is an "at-cost" provider, are they going to have to increase the expense ratios of their funds to compensate for those that excessively trade? Well, one could argue that the increased assets that will be poured in as a result will help to reduce costs and the economies of scales of the ETFs will reduce spreads and increase liquidity, making Vanguard ETFs even better. Rick Ferri, as quoted in the linked article, suggests that Vanguard's patented structure of mutual funds/ETFs will make this commission free trading advantageous to Vanguard mutual fund holders as well. In regards to money management, I feel like it's a relatively well-known fact that the highest net worth individuals pretty much pay the bulk of the money manager's salary. It does seem somewhat of an odd setup, but I guess money managers have found that those with more money are willing and able to pay more money. All in all, this Vanguard news is certainly welcome, but there are definitely a couple concerns associated with this new announcement that will be interesting to track. Thanks for the comment!

    ReplyDelete
  3. I think money management is a confluence of special factors that allows excessive compensation. In addition to the economies of scale there is the indirect payment method. Telling someone you only charge 1% and then taking it out of the account makes it seem somewhat miniscule. Economists have shown that people who charge items tend not to recall prices as well as those who pay cash. I think we have the same thing with how fees are deducted from the account rather than paid explicitely.
    $10,000/year to manage $1.0 million seems excessive.
    This comes from someone who feels he was paid a lot more than he was worth for part of his career. And I was nowhere near the big boys!

    ReplyDelete
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