Vanguard Tries To Ruin Your Investing Tax Break

February 14, 2008

You can count on mutual fund companies to try to squash any product they think is a competitive threat to their multi-trillion-dollar-in-assets cash machine.

The latest attack on mutual fund dominance is from the relatively unknown exchange traded notes (ETN). These ETF-esque securities are essentially exchange traded derivative contracts. The main force behind ETNs is Barclays iPath® Currency Exchange Traded Notes. With their popular iShares lineup, Barclays is already a big player in ordinary exchange traded funds (ETFs). So far the offerings are mostly focused on commodities and currencies. Still, according to an article on today, Vanguard is already trying to nip notes in the bud:

Barclays Plc introduced a new product that put a scare into Vanguard Group Inc. and the rest of the $13 trillion U.S. mutual-fund industry. Now Congress and the Treasury Department are coming to the funds' aid.

The security, called an exchange-traded note, allows individual investors to buy a type of forward contract linked to commodities and assets ranging from oil to currencies to foreign stock indexes. It has lower fees than mutual funds, is less regulated and, for now, lets holders defer taxable income indefinitely.

While less than $10 billion of the notes have been issued so far, mutual-fund companies see the potential for the new instruments to catch on in a big way with investors. The notes are 'derivatives for the masses,' said Alex Gelinas, a tax lawyer at Sidley Austin LLP in New York. For the mutual funds, reining them in is 'the issue of the year.'

The funds argue that the way the notes are handled for tax purposes puts their products at a disadvantage. The industry's trade group wants the government to either scrap the notes' favorable tax treatment or extend it to them too....In response, the Investment Company Institute [ICI], the trade association representing Vanguard and other funds, sent letters to Congress and Treasury calling the tax advantages of exchange- traded notes 'unwarranted, unintended and unfair.'

It got results. The Treasury Department in December said the interest income generated by currency-related notes can't be deferred because they are debt instruments. It may rule on other types of notes this year."

This is not the the first time funds acted to protect their best interests. In recent years fund companies were concerned people would buy professionally managed stock baskets without the inefficiencies, regulations, and costs of the old fashioned mutual fund structure, so they sicked their trade group, the Investment Company Institute, on small upstarts offering these services. Fortunately for fund companies, the idea never gelled with consumers as similar exchange traded funds became popular.


Fidelity's New Funds Give You Your Money Back

October 15, 2007

Last week we told you about three new 'managed payout' mutual funds from Vanguard, which promise an up-to 7% yearly payout with minimal reduction of initial investment principle. The funds will be marketed to retirees who want a steady stream of income.

The Wall Street Journal reports on eleven new funds from Fidelity aimed at those same investors.

Fidelity's new funds build on the success of the company's target-date funds, says Boyce Greer, president of asset allocation at the company. The Income Replacement funds are also portfolios of Fidelity stock and bond funds, with a mix that grows more conservative over time.

But instead of building toward a target date -- like retirement -- these funds make payments to you until a date you choose. The 11 funds range from Income Replacement 2016 to 2036.

How much do you get? That changes every year. The company will figure your monthly payments as a percentage of your annual account balance. If your portfolio grows, so will your payments.

The percentage of money you get also rises closer to your horizon date.

At 20 years out, you get 6.4% of your balance spread over 12 monthly payments; by the time you're 10 years away, you'll be getting 10%. In the last year, the fund pays 100% of what's left."

The Fidelity funds are structured to behave more like annuities than the new Vanguard funds in that Fidelity's funds are basically giving investors back their own money over a period of time (along with the underlying investment returns). The payouts of the new Fidelity funds are more aggressive than the Vanguard funds but can erode the principal more aggressively as well.


See also: Vanguard’s 7% Forever Funds

Vanguard’s 7% Forever Funds

October 3, 2007

Vanguard recently announced plans to launch three new managed payout funds. Managed payout, managed distribution, or level-rate dividend policies mean the mutual fund company decides how much the fund’s distributions will be, or manage the portfolio specifically to create a certain distribution payment stream. With most mutual funds irregular capital gains and dividend distributions are the result of income and realized capital gains building up in the fund portfolio. According to Vanguard, their highest payout fund is:

…geared toward investors who seek a higher payout level to satisfy current spending needs while preserving their capital over the long term. This fund is expected to sustain a managed distribution policy with a 7% annual distribution rate…"

This move by Vanguard brings a little legitimacy to a sometimes questionable strategy used primarily by closed end funds to give investors the illusion of steady yield.

As investors retire, they want regular returns so they can live off their portfolio. Stocks offer growth to beat inflation, but little in the way of regular income – even a fund made up of the highest yielding common stocks in the market delivers under 4% today. Bonds offer slightly more yield, but no principal growth to offset 30 retirement years of inflation.

Vanguard’s new funds will attempt to address this problem. They will be formulated with the right asset mix to allow monthly liquidation at a rate as high as 7% a year with minimal principal downside... the rest of this article»

Ask MAX: What does MAX think of the Vanguard Target Retirement Fund?

March 16, 2007

Ken from St. Louis asks:

I am 26 and am staring an investment portfolio with $6,000. What do you think about Vanguard's Target Retirement 2045 Fund?"

Despite the fact that it sounds to us more like the title of Arnold Schwarzenegger's last movie than a mutual fund (YOU'RE TERMINATED AARP!), for a guy in your footloose-and-fancy-free shoes, we think Vanguard's Target Retirement 2045 Fund (VTIVX) is not a half-bad way to go.

Vanguard currently has six Target Retirement funds, ranging from the Target 2045 for investors who aren't planning on hanging it up for forty years or so, to the Vanguard Target Retirement Income Fund Summary, which is for those who are currently retired.

The idea behind the Target Retirement funds is that the funds adjust their allocation as you grow older. A young whippersnapper like you buys the fund today and your money is invested in a decidedly growth-focused 88% stocks and 12% bonds. In the next forty years, the fund's manager slowly lowers your equity allocation and increases your bond allocation. If you stuck with the fund for the long haul, by the time you reach your 'target retirement' date your investment’s allocation would flip to an income-focused 30% stocks and 70% bonds. A few years after retirement, the fund will resemble the Vanguard Target Retirement Income. the rest of this article»

Vanguard Online Troubles

March 2, 2007

If you had trouble accessing your account via yesterday, you weren't the only one:

A computer network outage at The Vanguard Group, which manages $1.1 trillion in mutual fund assets, temporarily left customers unable to access online accounts Thursday afternoon.

The glitch blocked customers from using Vanguard's Web site to place trades or check 401(k)s and other accounts in the wake of Tuesday's big sell-off on Wall Street.

Vanguard spokesman John Woerth said the outage lasted about an hour. It did not prevent customers from registering trades by calling Vanguard's toll-free number; if they did so they would have been guaranteed a fund's 4 p.m. price, Woerth said. Mutual funds are priced once a day.


We’ve experienced some sluggishness logging in to brokerage account websites this week ourselves. With record trading volumes amidst the market mini-crash Tuesday, it’s no wonder.

Of course, site sluggishness is nothing compared to the stock exchange. At one point during the slide on Tuesday the Dow fell over 100 points in just a few seconds. Turns out the Dow calculations were lagging badly behind the underlying stock price. We’re not sure what this means to those that bought say, the Dow Diamonds (DIA) ETF at an artificially high price moments before it fell hard – though the ETF appeared to be priced a little more accurately than the Dow itself.

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