(PUB) Investing 2015

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6 • Fund Family Shareholder Association
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
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
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
PrimeMoneyMarket’s Yield
Is on theMat
10/094/1010/104/1110/114/1210/124/1310/134/1410/144/15
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
Staunching the Waiver Bleed
Most recent 6 months
through
Expenses
waived
Prior
6 months
Admiral Treasury Money Market 2/28/2015 ($2,909,000) ($2,623,000)
Federal Money Market 2/28/2015 ($298,000) ($373,000)
Prime Money Market 2/28/2015 ($8,126,000) ($6,651,000)
Tax-Exempt Money Market 10/31/2014 ($7,103,000) ($5,837,000)
CA Money Market 11/31/2014 ($1,840,000) ($1,551,000)
NJ Money Market 11/31/2014 ($649,000) ($572,000)
NY Money Market 11/31/2014 ($1,163,000) ($1,001,000)
OH Money Market 11/31/2014 ($240,000) ($199,000)
PA Money Market 11/31/2014 ($1,226,000) ($1,166,000)
Money Market Annuity 12/31/2014 ($619,000) ($637,000)
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.
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
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-
TAX EFFICIENCY
What About ETFs?