(PUB) Investing 2016

the report. You can find them in a table headed “Financial Highlights.” In fact, as we were finishing up this letter, Vanguard released annual reports for a number of funds whose fiscal years end in January. I found it fascinating that for Precious Metals

tale: “The fund expense ratios shown [in the table] are from the prospectus dated [say, April 29, 2015] and rep- resent estimated costs for the current fiscal year.” The actual expense ratios are listed in the footnotes, but also in the financial statements deeper into

COSTS FROM PAGE 1 >

Of course, that 33% increase was but a mere basis point, from 0.03% to 0.04%, between June 30, 2015 and December 31, 2015. But if you’ve been reading Vanguard’s press releases, you know that minuscule basis point changes like these look a whole lot bigger when translated into percent- ages, so that’s how Vanguard portrays them. Their latest press initiative cited expense ratio reductions ranging from 7% to 27%. Obviously, for expenses to have fall- en overall in 2015, but to have risen in the year’s final six months, expenses fell more during the first six months of 2015 before they reversed course. Over the last six months of 2015, operating expense increases ranged from 5% to 33%, though virtually all of the changes were an increase of just one basis point. It’s always nice to see expenses fall, but when you’re talking one or two basis points on already-low expense ratios, it gets harder and harder to make any real news out of it. And it’s no surprise that Vanguard would rath- er promote expenses falling over 12 months than expenses rising over six. Now, there’s something else you need to know, and it’s important: When Vanguard talks about lowering expense ratios, it’s talking about lowering them in its prospectuses. It will issue a new prospectus for a fund, report a lower expense ratio, and claim it as a decrease. However, that’s not really accurate. When Vanguard reports a new expense ratio in a prospectus, it’s an estimate. That’s right—it’s an edu- cated guess. Only twice a year does Vanguard report actual, audited expense ratios rather than estimates, and that’s in each fund’s semiannual and annual reports. If you read the letter to share- holders in those reports, you’ll see that Vanguard always compares its funds’ expense ratios with their peers. However, the expense ratios they use for the comparisons aren’t accurate, because they are taken from prospec- tuses. Vanguard’s footnote tells the

When Expenses Rise

————— REPORTED OPERATING EXPENSES —————

12/31/14 Change from Jun. Intermediate-Term Bond Index Inst. Plus 0.05% 0.03% -40% 0.04% 33% Admiral 500 Index 0.05% 0.04% -20% 0.05% 25% Admiral Total Stock Market Index 0.05% 0.04% -20% 0.05% 25% S&P 500 ETF 0.05% 0.04% -20% 0.05% 25% Total Stock Market ETF 0.05% 0.04% -20% 0.05% 25% MidCap Index Inst. Plus 0.06% 0.04% -33% 0.05% 25% SmallCap Index Inst. Plus 0.06% 0.04% -33% 0.05% 25% Intermediate-Term Bond Index Inst. 0.07% 0.05% -29% 0.06% 20% Short-Term Bond Index Institutional 0.07% 0.05% -29% 0.06% 20% Balanced Index Inst. 0.08% 0.06% -25% 0.07% 17% Extended Market Inst. 0.08% 0.06% -25% 0.07% 17% Growth Index Inst. 0.08% 0.06% -25% 0.07% 17% LargeCap Index Inst. 0.08% 0.06% -25% 0.07% 17% MidCap Index Inst. 0.08% 0.06% -25% 0.07% 17% SmallCap Index Inst. 0.08% 0.06% -25% 0.07% 17% Tax-Managed Cap. Apprec. Inst. 0.08% 0.06% -25% 0.07% 17% Value Index Inst. 0.08% 0.06% -25% 0.07% 17% Tax-Managed SmallCap Index Inst. 0.08% 0.06% -21% 0.07% 16% Admiral SmallCap Index 0.09% 0.07% -22% 0.08% 14% Admiral Growth Index 0.09% 0.07% -22% 0.08% 14% Admiral MidCap Growth Index 0.09% 0.07% -22% 0.08% 14% Admiral MidCap Index 0.09% 0.07% -22% 0.08% 14% Admiral MidCap Value Index 0.09% 0.07% -22% 0.08% 14% Admiral LargeCap Index 0.09% 0.07% -22% 0.08% 14% Admiral Value Index 0.09% 0.07% -22% 0.08% 14% Admiral Balanced Index 0.09% 0.07% -22% 0.08% 14% SmallCap ETF 0.09% 0.07% -22% 0.08% 14% Growth ETF 0.09% 0.07% -22% 0.08% 14% MidCap Growth ETF 0.09% 0.07% -22% 0.08% 14% MidCap ETF 0.09% 0.07% -22% 0.08% 14% MidCap Value ETF 0.09% 0.07% -22% 0.08% 14% LargeCap ETF 0.09% 0.07% -22% 0.08% 14% Value ETF 0.09% 0.07% -22% 0.08% 14% Admiral Extended Mkt. Index 0.10% 0.08% -20% 0.09% 13% Admiral Short-Term Bond Index 0.10% 0.08% -20% 0.09% 13% Admiral Intermed.-Term Bond Index 0.10% 0.08% -20% 0.09% 13% Extended Market ETF 0.10% 0.08% -20% 0.09% 13% Short-Term Bond ETF 0.10% 0.08% -20% 0.09% 13% Intermediate-Term Bond ETF 0.10% 0.08% -20% 0.09% 13% Long-Term Bond ETF 0.10% 0.08% -20% 0.09% 13% Admiral Inflation-Protected Sec. 0.10% 0.09% -10% 0.10% 11% Tax-Managed Balanced 0.12% 0.10% -17% 0.11% 10% Tax-Managed SmallCap 0.12% 0.10% -17% 0.11% 10% Tax-Managed Capital Appreciation 0.12% 0.10% -17% 0.11% 10% 500 Index 0.17% 0.15% -12% 0.16% 7% Total Stock Market Index 0.17% 0.15% -12% 0.16% 7% SmallCap Growth Index 0.23% 0.19% -17% 0.20% 5% Inflation-Protected Securities 0.20% 0.19% -5% 0.20% 5% Extended Market Index 0.23% 0.21% -9% 0.22% 5% Growth Index 0.23% 0.21% -9% 0.22% 5% Value Index 0.23% 0.21% -9% 0.22% 5% Balanced Index 0.23% 0.21% -9% 0.22% 5% Source: Vanguard semiannual and annual reports. 6/30/15 Change from Dec. 12/31/15

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