(PUB) Investing 2015

increase over the prior six months’ fee waivers. The impact of these discounts: Yields of 0.01%, which meets the goal of keeping yields in the black—barely. That said, don’t for a minute think that Vanguard is going without. The company collected almost $174 million in fees for advising, administering and marketing the 10 money funds, collectively. As I noted a few months ago, Vanguard will be facing a multimillion- dollar decision in the coming months if the Fed begins hiking short-term interest rates. And Vanguard isn’t alone. Competitors are facing the same choice, but for them, it’s measured in billions. The conundrum: Allow money fund yields to rise as the Fed begins raising interest rates, or begin paying them- selves back for years of self-imposed fee waivers? According to the ICI, the fund industry trade group, money fund waivers totaled an estimated $5.8 bil- lion (that’s right, billion) in 2013 alone, up 20.8% from an estimated $4.8 bil- lion in waivers in 2012. The 2014 num- bers aren’t yet available. Some fund

over the past couple of years, the dollar value has been revealed in the money funds’ semiannual and annual reports’ financial statements. Vanguard used to be an outspoken critic of fee waivers. Their stance was summed up in 2004 by Michael Miller, a Vanguard managing director, who said, “If a fund company is going to reduce fees, it should be willing to do it permanently.” That criticism died as Vanguard was forced to put its own waivers in place. I’m wondering how long Vanguard will keep its money market fee waivers in place once yields begin rising. That said, let’s put Vanguard’s cur- rent fee-waiver dilemma into perspec- tive. Over the most recent 12 months, Vanguard waived a bit more than $14.7 million on Prime Money Market , a fund with approximately $132 billion in assets at the end of its most recent fiscal half-year. Now, take a look at Schwab Cash Reserves money fund, with about $39 billion in assets. Schwab waived $178.2 million in expenses to “maintain a positive net yield,” as described in the fine print of its annual report. What does this tell you about the unholy expenses some companies charge for money market funds? I’ll have more for you once the ICI releases its data for 2014. But for the moment, when thinking about the impact of Fed rate hikes in the months to come, consider what this will mean for money market funds that have been struggling against huge fees to keep yields above 0.00%. n

PrimeMoneyMarket’s Yield Is on theMat

0.35%

0.30%

0.25%

0.20%

0.15%

0.10%

0.05%

0.00%

4/10

4/11

4/12

4/13

4/14

4/15

10/09

10/10

10/11

10/12

10/13

10/14

companies actually have the option to recoup their waived fees. Guess whose hide that comes out of? Vanguard began to waive certain operating expenses on its money mar- ket funds as far back as 2009. Vanguard called these “temporary limits” on some expenses, but the bottom line is the bottom line: Vanguard was cutting back on expenses to make sure money market yields stayed above zero. At first, it didn’t disclose the numbers, but

Staunching the Waiver Bleed

Most recent 6 months through

Expenses waived

Prior 6 months

Admiral Treasury Money Market Federal Money Market Prime Money Market Tax-Exempt Money Market

2/28/2015 2/28/2015 2/28/2015 10/31/2014 11/31/2014 11/31/2014 11/31/2014 11/31/2014 11/31/2014 12/31/2014

($2,909,000) ($298,000) ($8,126,000) ($7,103,000) ($1,840,000) ($649,000) ($1,163,000) ($240,000) ($1,226,000) ($619,000)

($2,623,000) ($373,000) ($6,651,000) ($5,837,000) ($1,551,000) ($572,000) ($1,001,000) ($199,000) ($1,166,000) ($637,000)

CA Money Market NJ Money Market NY Money Market OH Money Market PA Money Market

Money Market Annuity

MANY OF VANGUARD’S open-end mutual funds are very tax efficient, as last month’s article showed. But what about the vaunted tax efficiency of exchange- traded funds—in particular, Vanguard’s? As I’m sure you know, ETFs have long been touted as the most tax-effi- cient way to invest. It’s one of the ETF industry’s calling cards. TAX EFFICIENCY What About ETFs?

data now available, I’d say it’s pretty conclusive that from an investor’s tax perspective, the ETF has no particular advantage over the open-end index fund. And vice versa . In the table on the next page, I’ve grouped sib- ling ETFs and index funds with the ETF listed first. I’ve used Vanguard’s Investor shares to represent the open-

However, more than three years ago, I showed you some preliminary data to indicate that ETFs might not be any better at keeping taxes at bay than a regular old open-end index fund. In fact, I told you that in some cases, the old format was better than the new. Well, with several more years of

6 • Fund Family Shareholder Association

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