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The Independent Adviser for Vanguard Investors
•
April 2016
•
5
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
OVER TWO WEEKS
, Vanguard launched
four funds—two foreign stock index
funds and two actively managed bond
funds—that aim in part to meet investors’
demands for greater income. Though the
promise of greater yields is tempting, I
wouldn’t rush to buy any of these funds.
Let’s start with the foreign stock
index funds. First announced back in
September,
International Dividend
Appreciation Index
and
International
High Dividend Yield Index
saw their
launch dates pushed back three times.
They finally opened in late February in
both open-end and ETF formats.
Expenses are low. The Investor
shares of International Dividend
Appreciation Index are estimating
expenses of 0.35%, while the Admiral
and ETF shares are coming in at 0.25%.
The expenses on International High
Dividend Yield Index are estimated to
be 5 basis points, or 0.05% higher—
so 0.40% for the Investor shares and
0.30% for the Admiral and ETF shares.
International Dividend Appreciation
Indexaims to trackahigher-qualityvariant
of the NASDAQ International Dividend
Achievers Index called the NASDAQ
International Dividend Achievers Select
Index. The Select version does not have
a long track record, but we can look
to the non-Select index, which dates
to September 2005 and is tracked by
the PowerShares International Dividend
Achievers ETF (PID), to start to build
some expectations around the new fund.
As you can see in the relative perfor-
mance chart on page 6, there have been
periods when the Dividend Achievers
NEW FUNDS
More Options for Income
& Mining
, for instance, Vanguard
reported prospectus expenses of
0.29%, but then acknowledged in the
footnotes that the actual expense ratio
was 0.35%. Vanguard wrote that the
difference was due to performance
fee adjustments—the manager was
docked less money in the current year
versus the prior year. So, as I said,
the prospectus numbers are simply
estimates.
Pulling all the numbers for the 34
different funds that reported in January,
it’s pretty evident that Vanguard’s costs
were going up in the latter part of 2015
and into 2016. Twenty-nine of the 34
funds saw expenses rise over the six
months ending January 31 by anywhere
from 4% to 17%.
Now, just to be clear, when I first
released my findings that more than
50 funds saw expense ratios rise in
the second half of 2015,
TheStreet.
com
reported that Vanguard claimed my
reporting was “sensationalist.” I had to
laugh, since Vanguard’s argument was
that their prospectus estimates were
accurate and that “expense ratios will
fluctuate throughout the year,” and that
“slicing and dicing in that fashion is
misleading to investors.” I’d say that
if you want to talk about misleading,
then you shouldn’t claim that estimates
are actual, real-world numbers inves-
tors can rely on. (As I noted, take a
look at Precious Metals & Mining’s
annual report for evidence.) Using esti-
mates is misleading and sensationalist.
Of course, Vanguard wasn’t about to tell
TheStreet.com
or its shareholders why
operating expenses rose in the second
half of 2015, but that’s another story.
n
QUOTABLE
“Best Of” Lists
I DON’T KNOW ABOUT YOU, but when I see financial journals publishing “Best Of” lists of
mutual funds, ETFs, stocks or what-have-you, I tend to run the other way. What is considered
the “best” one year can often be the worst the next, or (as is usually the case with these lists)
one year’s best is simply forgotten in the following year. I used to track “Best Of” lists from
Bloomberg BusinessWeek
,
Forbes
,
Money
,
SmartMoney
and the like to see if there was any
agreement between them (there was little), but after a while the year-to-year changes were so
huge and without explanation that, well, it got to be a fruitless exercise.
So, I was amused to see Vanguard giving “Best Of” lists their seal of approval. Now, I’m not
surprised that they recently trumpeted landing six of their ETFs on the inaugural “Kiplinger’s
ETF 20” list, but I was surprised to read that “‘Best of’ lists such as the ‘Kiplinger’s ETF 20’ are
a great place to start your evaluation of investment options.” Really? Well, I guess the caveats
in this statement give Vanguard an out, but imagine my surprise when Vanguard’s posting to
financial advisers on the same topic toned the advice way down, and simply said that lists like
Kiplinger’s “may be popular with clients and a basis of conversation.”
They’re closer to the truth there. The gist of my conversation with a client about these
lists would be to ignore them, as there is always one factor or another that drives the selec-
tion process that may be at odds with your own criteria for finding suitable investments.
Performance over a single point in time, operating expenses and trading volume may be of
interest—or may not.
Just take a look, if you can find them, at the past few years of
Money
’s “Best Of” lists. How
is it that
MidCap ETF
shows up on the list in 2010 but wasn’t found in, say, the 2014 or 2015
lists? Did the fund change? (No.) Did the operating expense go up? (Again, no.) Or did the list’s
criteria for inclusion change? (Maybe.) The same question could be asked of
World ex-U.S.
ETF
or
Emerging Markets Stock ETF
, both of which were also on the 2010 list.
As I said, don’t give those “Best Of” lists a second glance.
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