GaryA505 wrote: ↑Wed Jan 26, 2022 2:26 pm
As one who has accounts at both Vanguard and Fidelity, AND would like to consolidate at one of them, AND is on the fence about which one to choose, this may help me make a decision. I mean, Vanguard threw their retail investors under the bus once already, so what's to stop them from doing it with other funds? Could VFIAX and VTSAX be next? Why not, nobody saw this one coming either.
"Could VFIAX and VTSAX be next? Why not, nobody saw this one coming either." The problem could apply to Fidelity or other mutual fund companies as well.
Also, a retail fund could (theoretically) have very large redemptions even if Vanguard doesn't do what happened with the TD funds. Imagine: fund X comes along and persuades institutions/401ks to swap out of VTSAX and into fund X. Vanguard has to sell the stocks in VTSAX in order to pay off the leaving shareholders; the capital gains are passed on to the remaining shareholders. At no time did Vanguard do anything to encourage the redemptions. I.e., there are things outside of Vanguard's control that could cause the large cap gains problem for retail investors. It could even happen whether there are institutional share classes or not.
That's all speaking in generalities. Is it likely to happen? Maybe, maybe not. Consider that VTSAX and VFIAX are
very low cost already. One reason (among several) that 401k plans got out of the Target Date Investor shares was that the Institutional share fund was significantly cheaper. Does that situation exist with VTSAX and VFIAX? You'd have to ask all the institution/401k plans out there to see if they'd switch to go from VTSAX 0.04% ER to 0.02% or 0.01% or whatever the institutional classes are.
Another factor to consider: how heavily do institutional/401k plans use single asset funds like VTSAX versus Target Date? My understanding is that a very large majority of institutional plan assets are in TD funds (just in general). That suggests the amount of Admiral share assets at risk of moving to cheaper Institutional shares is low enough that even if those assets did switch, it may not affect the Admiral shares all that much. But I don't keep close accounting on the asset amounts. You can look them up on the institutional.vanguard.com site if you're interested.
I would caution against using "what's to stop them from doing it with other funds" line of reasoning to get out of the funds. The problem can happen without Vanguard actually doing anything. And it could also happen with other fund managers, like Fidelity. How do you know they won't commit an operational faux pas (like they did in 2019)?
My opinion is that the problems are very unlikely to happen with VTSAX or VFIAX. Sorry, but I offer no guarantees