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Friday, April 25, 2003

Vanguard Targets Arbitrageurs with Extra Fee

by: Sean Hanna, Editor in Chief

Vanguard is taking aim at arbitrageurs who try to take advantage of pricing discrepancies in its international funds. Rather than adopt special valuation methodologies or throw investors or advisors out of the funds -- both strategies adopted at some other complexes -- Vanguard is taking a rather more straightforward approach: it is making them pay.

On June 27, the Valley Forge, Pennsylvania-based fund firm is adding a 2 percent redemption fee on sales of shares in nine funds that investors hold for less than two months. For the past sixteen months Vanguard has tried a less stringent measure to curb arbitrage in its international funds. Since January, 2002 it has limited shareholders to two telephone or online exchanges out of a fund within a rolling 12-month period, and cut off telephone and online exchanges of fund shares after 2:30 PM Eastern time.

Vanguard officials said that those policies did help and that they will stay it place, but added that the funds' Board of Trustees believed that a more stringent policy was needed.

"We believe that a short-term redemption fee will serve as an effective means of ending this adverse trading activity. Our primary concern is to protect the interests of our long-term shareholders, by ensuring that fund returns are not eroded by the exploitive actions of a few shareholders," explained Gus Sauter, managing director-Vanguard Quantitative Equity Group.

Sauter took pains, though, to clarify that Vanguard is not adding the fee to boost its revenues. "This is a redemption fee, however, we hope to never collect," he added.

The funds for which the fees will be added include:

  • Vanguard International Growth
  • Vanguard International Value
  • Vanguard International Explorer
  • Vanguard Total International Stock Index Fund
  • Vanguard European Stock Index Fund
  • Vanguard Pacific Stock Index Fund
  • Vanguard Developed Markets Index Fund
  • Vanguard Institutional Developed Markets Index Fund
  • Vanguard Emerging Markets Stock Index Fund  

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