Vanguard Move Slashes Costs for Smaller Investors

The company that pioneered ultra-low-cost mutual fund investing through index funds just made it easier to buy lower-fee shares.

The Vanguard Group recently announced that it has lowered the minimum required investment for Admiral Shares of 38 of the company’s index funds. Whereas you previously needed an initial investment of at least $10,000 to buy Admiral Shares of these 38 funds, you now need $3,000.

This is a big deal. Admiral Shares have lower fees than the other type of share that Vanguard offers, known as Investor Shares.

Even a seemingly small difference in fees can erode your nest egg, easily costing you tens of thousands of dollars over your working lifetime, as we detail in “Of All the Fees You Pay, This Is the Worst.”

The 38 index funds for which Vanguard has dropped the Admiral Share minimum include:

• The Vanguard 500 Index Fund — owned and extolled by the likes of Warren Buffett and our own Money Talks News founder Stacy Johnson
• The Vanguard Total Stock Market Index Fund

How lower minimums equate to lower fees

By lowering the investment minimum for Admiral Shares of 38 index funds, Vanguard has effectively lowered the fees for those funds.

The Vanguard 500 Index Fund, for example, now has about 71 percent lower fees — meaning it’s now 71 percent cheaper to own.

How is that possible? Let’s back up a step to see what all changed.

Before the recent change to the Vanguard 500 Index Fund, Vanguard offered two versions of it:

• Vanguard 500 Index Fund Investor Shares (VFINX), which required a minimum initial investment of $3,000 and most recently had an expense ratio of 0.14 percent
• Vanguard 500 Index Fund Admiral Shares (VFIAX), which required a minimum initial investment of $10,000 and had an expense ratio of 0.04 percent — about 71 percent less than the expense ratio for Admiral Shares

Now, Investor Shares are no longer available in those funds, and Admiral Shares will have a $3,000 minimum. Vanguard also says:

Any remaining Investor class shareholders will be automatically converted to Admiral Shares beginning in the second quarter of 2019. Share conversions within the same fund are tax-free.

So, for example, any new or existing Vanguard customer with $3,000 to invest can now enjoy a 71 percent lower expense ratio in the Vanguard 500 Index Fund.

An expense ratio is the annual operating cost for a mutual fund that gets passed on to investors. It’s expressed as a percentage of your investment. So, if you have $3,000 invested in the Vanguard 500 Index Fund, it will now cost you $1.20 per year (0.04 percent) to own the shares — instead of $4.20 per year (0.14 percent).

What if you don’t have $3,000 to invest?

If $3,000 is too much for you to plop down at once but you like the idea of ultra-low-cost index funds, consider investing in exchange traded funds, or ETFs. They are basically index funds that are traded on exchanges like shares of individual stock.

You can generally buy fractional shares of ETFs, so there is generally no minimum investment required. Money Talks News founder Stacy Johnson explains ETFs further in “2-Minute Money Manager: Should I Invest With ETFs?”

What’s your take on the news about Vanguard minimums? Share your thoughts below or over on our Facebook page.