Vanguard
New Vanguard Global Index Fund - It's About Time
Everybody loves indexing, and indexing pioneer Vanguard certainly doesn't shut their yap about the benefits of indexing, but for some strange reason Vanguard has yet to deliver a global stock index fund. Vanguard offers dozens of index funds - now in ETF format as well as traditional open-end funds - to cover U.S. stocks and foreign markets, but they don't have a one stop product that lets a truly passive investor buy a single stock fund that invests in world equity markets.
Well, soon they will:
Vanguard filed a registration statement on Wednesday, April 2, 2008, with the U.S. Securities and Exchange Commission (SEC) to offer a global equity index fund—Vanguard Global Stock Index Fund. The fund will offer three share classes—Investor, Institutional, and ETFs—that are expected to be available in the second quarter of 2008. This will be Vanguard's first passively managed global index fund.
The new fund will seek to track the performance of the FTSE All-World Index, a float-adjusted, market capitalization-weighted index designed to measure equity market performance of large- and mid-capitalization stocks worldwide. The fund will invest in a broadly diversified sampling of securities from the target benchmark, which comprises more than 2,800 large- and mid-cap stocks of companies in 48 foreign countries. Approximately 55% of the index is made up of stocks from outside the U.S."
The index fund open-end version's 0.45% expense ratio is not as cheap as other Vanguard U.S. index funds, and is just 0.19% cheaper than Vanguards actively managed global stock fund, Vanguard Global Equity (VHGEX).
Vanguard is also adding purchase fees to buy the open-end version of this new index fund, along with the usual redemption fees:
To offset the transaction costs associated with global investing and to protect the interests of long-term fund shareholders, the fund will assess a 0.15% purchase fee on all non-ETF share purchases and a 2% redemption fee on all non-ETF assets redeemed within two months of purchase."
This front and back fee levy should lead to slightly better quoted performance of the open-end fund than the closed end fund, even factoring in higher fund expenses (the ETF costs 0.25%).
Vanguard is really just playing catch-up here. Barclays iShares unit just launched a global stock ETF, iShares MSCI ACWI Index Fund (ACWI), which started just last week. Barclay's fund owns 711 holdings to mimic an index of 2,884 stocks and comes with an 0.35% expense ratio - more than the Vanguard ETF but less than the Vanguard open-end fund.
Global indexing made more sense before foreign stocks outpaced U.S. stocks, as they have for the past several years. At this point we expect U.S. stocks to beat foreign stocks going forward. Our predictions aside, for those looking for a one stop stock fund they can buy and ignore for twenty years, this is it. No word on where the one stop global stock AND bond index fund is - we need that even more, especially in 401(k) plans.
Muni Money Market Yields Skyrocket
Money market funds have quickly taken center stage in the real-estate-bubble-created credit crisis. Last week we saw 'safe' money market funds slip under a buck a share. A true run-on-the-bank-style panic was averted by (yet) another government scheme to calm the jittery (who are mostly institutional investors incidentally). Around $150 billion flew the money market fund coop early last week before Uncle Sam said 'keep buying increasingly questionable commercial paper, we'll pick up the losses!" Outflows dropped to just a few billion a day.
Now we're seeing tax free municipal money market fund yields skyrocket - which could be a good thing for investors. Hopefully. Tax free money market funds own debt issued by state and local governments - not corporations like the now defunct Lehman Brothers. Traditionally this is a very low risk investment, but then traditionally banks aren't failing every few days as a twenty trillion dollar real estate bubble deflates.
Today truly 'safe' money market funds that own government debt yield less than 2% (and falling). This below-inflation yield is also taxable. Municipal money market funds traditionally yield a little less than taxable money market funds, but can yield a little more after taxes to those in high tax brackets. Today this relationship is out the window. Now the unemployed will even earn a better after-tax yield in muni funds. A lot better. So much better that something just can't be right.
On Vanguard.com today, yields ranged from 1.52% for the taxable Treasury Money Market fund, to over 5% for certain single-state muni funds that let residents avoid state and federal tax on income. For those in a high tax bracket in Pennsylvania, this is like an 8%+ taxable yield on 'safe' money. Similar yield spreads can be seen on Fidelity and other money market fund manager's web sites.
How did this happen? Looking at Investment Company Institute data, in recent days money has been leaving muni money market funds faster than from taxable funds - a grave concern considering there is only about 15% as much money in muni funds. This, plus general problems in the municipal bond market partially because of Lehman's failure, has led to skyrocketing yields.
Is it safe? As we noted last year, even good money market funds can fail and break the buck if there is panic selling and nobody is left to buy the portfolio holdings - regardless of the their soundness. The same is true for municipal funds. However - and this is a big however - the government is also insuring muni money market funds from losses (according to the ICI). The coverage only includes those who bought in before September 19th, so those grandfathered in now have a 5% tax free federally insured investment while those buying in today are probably taking a risk (but if the flows of funds turns positive that risk will be negligible). Investors can tell if flows turn positive - the yields will fall back to earth.
Enjoy it while it lasts!