Why [does] Vanguard's VAIPX have such a high expense ratio?

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gabefair
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Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by gabefair »

I feel like the expense ratio for Vanguard's Inflation-Protected Securities Fund Admiral Shares (VAIPX) is much higher than it needs to be. Its currently at 0.10% but has always had only one holding. U.S. Government Inflation Protected Treasury Bonds.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jebmke »

Maybe it is a scale issue. For any significant Tips allocation, there is really no compelling reason not to buy individual bonds. It is really easy to do.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Willmunny »

Perhaps the scale issue is something with TIPS as opposed to nominal Treasuries, but it does seem odd to me that a Treasury bond fund or ETF isn't the lowest expense ratio product out there. For example, VGIT (Intermediate Treasury) has an expense ratio of 0.04 while BND has an expense ratio of 0.0035. This obviously is a very insignificant difference, these are both very good expense ratios, and it is actually getting better (BND used to be significantly lower in expense ratio if I recall correctly). I've just never understood the rationale for BND being lower in expense ratio.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by alex_686 »

Another vote for scale.
Willmunny wrote: Tue Jan 18, 2022 6:45 am… but it does seem odd to me that a Treasury bond fund or ETF isn't the lowest expense ratio product out there.
Why would you think that? I can’t think of one and I used to do this for a living. Maybe you are thinking of trading costs? Expect that is not counted as part of the expense ratio.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Willmunny »

alex_686 wrote: Tue Jan 18, 2022 6:58 am Another vote for scale.
Willmunny wrote: Tue Jan 18, 2022 6:45 am… but it does seem odd to me that a Treasury bond fund or ETF isn't the lowest expense ratio product out there.
Why would you think that? I can’t think of one and I used to do this for a living. Maybe you are thinking of trading costs? Expect that is not counted as part of the expense ratio.

I would think that because the fund manager would not have to diversify by purchasing thousands of bonds. Just get the right duration mix and you can have very few individual holdings with a pure Treasury fund. It looks like VGIT owns 112 bonds and BND owns over 10,000 bonds. Both have a good ER right now, so it is more theoretical wondering on my part than a complaint or something I care deeply about. If that should not make a difference in the ER, I would be happy to learn why not. Thank you.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by exodusNH »

jebmke wrote: Tue Jan 18, 2022 6:34 am Maybe it is a scale issue. For any significant Tips allocation, there is really no compelling reason not to buy individual bonds. It is really easy to do.
I can think of two reasons.

With individual bonds, you wind up having to pay income tax on the inflation adjustments with external cash since you don't get those until the bond matures.

With TIPS funds, they pay out those adjustments which you can hold some back for the tax.

Individual bonds have a fixed maturity. You get the cash at date X regardless if you need it. If you need it earlier, you have to deal with the secondary market vs clicking "sell" with the fund.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by nisiprius »

"It is really easy to do" is the same kind of statement as "it is really easy to drive a stick-shift" or "it is really easy to make an omelet" or "it is really easy to paddle a canoe." It's not very hard, millions of people do it--but it only seems "easy" after you get the hang of it.

I held individual TIPS from the first one I bought, circa 1998, until about 2012.

I sold them all and bought VAIPX instead.

I honestly think this is sub-optimal, and not what I had planned. But after helping deal with the assets of deceased person, I realized that a portfolio of six mutual funds would be a lot easier for my wife to understand and deal with, should the need arise, than a thirty-page-long statement. (Vanguard lists the characteristics of each bond in a narrow column and only manages to list two TIPS per page).

And she knows the procedure for selling mutual funds, but not TIPS. Yes, I know it's not that difficult. Very likely you can call Vanguard and say "I want to sell this TIPS" and they'll do it and charge $25.

There's a huge difference between something you have a hobby-level interest in, and dirty your hands in a few times a year or more, and something you really don't know about. Things like buying and selling individual bonds is something that seems easy to do once you get the hang of it, but you forget the mild but real amount of fear and confusion that I (at least) felt the first few times I did it.

And "writing out instructions" is probably not the answer. If someone really doesn't have a minimal level of savvy, it is amazing how quickly a set of specific step-by-step directions goes stale because of some trivial change in a website. A person with minimal savvy can figure out the necessary course corrections, but a person following directions literally, with no real understanding, can't.
Last edited by nisiprius on Tue Jan 18, 2022 7:49 am, edited 1 time in total.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by alex_686 »

Willmunny wrote: Tue Jan 18, 2022 7:19 am
alex_686 wrote: Tue Jan 18, 2022 6:58 am Another vote for scale.
Willmunny wrote: Tue Jan 18, 2022 6:45 am… but it does seem odd to me that a Treasury bond fund or ETF isn't the lowest expense ratio product out there.
Why would you think that? I can’t think of one and I used to do this for a living. Maybe you are thinking of trading costs? Expect that is not counted as part of the expense ratio.

I would think that because the fund manager would not have to diversify by purchasing thousands of bonds. Just get the right duration mix and you can have very few individual holdings with a pure Treasury fund. It looks like VGIT owns 112 bonds and BND owns over 10,000 bonds. Both have a good ER right now, so it is more theoretical wondering on my part than a complaint or something I care deeply about. If that should not make a difference in the ER, I would be happy to learn why not. Thank you.
I would think the argument would run in the other direction.

With BND the portfolio manager just needs to follow the lust of bonds that the index provider gives. With VGIT you need to hire a portfolio manager that can think for themselves.

I kid somewhat. I used to write annual reports for mutual funds and thus had to calculate the ER. The portfolio managment expenses in terms of absolute dollars is only going to have a modest impact on expenses.

However they are broken out in the annual report. Why not look it up?
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jebmke »

exodusNH wrote: Tue Jan 18, 2022 7:21 am
jebmke wrote: Tue Jan 18, 2022 6:34 am Maybe it is a scale issue. For any significant Tips allocation, there is really no compelling reason not to buy individual bonds. It is really easy to do.
I can think of two reasons.

With individual bonds, you wind up having to pay income tax on the inflation adjustments with external cash since you don't get those until the bond matures.

With TIPS funds, they pay out those adjustments which you can hold some back for the tax.

Individual bonds have a fixed maturity. You get the cash at date X regardless if you need it. If you need it earlier, you have to deal with the secondary market vs clicking "sell" with the fund.
Well, the processing of phantom distributions would certainly add to cost. I can't think of a compelling reason to hold Tips in a taxable account though so for me, that proposition isn't an issue. Buying and selling Tips adds one click to the cash flow process - no more no less. I don't hold cash so if I needed money, I have to sell something anyway.

I can see for very small holdings - say < $500K a fund is probably a sensible choice for convenience.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by exodusNH »

jebmke wrote: Tue Jan 18, 2022 7:56 am
exodusNH wrote: Tue Jan 18, 2022 7:21 am
jebmke wrote: Tue Jan 18, 2022 6:34 am Maybe it is a scale issue. For any significant Tips allocation, there is really no compelling reason not to buy individual bonds. It is really easy to do.
I can think of two reasons.

With individual bonds, you wind up having to pay income tax on the inflation adjustments with external cash since you don't get those until the bond matures.

With TIPS funds, they pay out those adjustments which you can hold some back for the tax.

Individual bonds have a fixed maturity. You get the cash at date X regardless if you need it. If you need it earlier, you have to deal with the secondary market vs clicking "sell" with the fund.
Well, the processing of phantom distributions would certainly add to cost. I can't think of a compelling reason to hold Tips in a taxable account though so for me, that proposition isn't an issue. Buying and selling Tips adds one click to the cash flow process - no more no less. I don't hold cash so if I needed money, I have to sell something anyway.

I can see for very small holdings - say < $500K a fund is probably a sensible choice for convenience.
Heh. You and I have very different definitions of small. My house + taxable account aren't even $500k.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by nisiprius »

1) For what it's worth, the Fidelity TIPS Index Fund, FIPDX, has an 0.05% expense ratio, net and gross. Is it cheaper because of being indexed?

For what it's worth, it has in fact outperformed VAIPX since inception, 2.68% versus 2.62% as I write this. Roughly equal to the ER difference. Coincidence?

(Hmmm... nowadays Vanguard is only charging a $20 fee for non-Vanguard-non-NTF funds. (Counting on fingers)... if I believed that 0.06% difference was persistent, it would actually benefit me to switch to FIPDX... but it's worth more to me to get off my butt and return those too-small slippers to Land's End...)

2) Before FIPDX, Fidelity's TIPS fund was FINPX. It was actively managed and is now shuttered. The ER was something like 0.45% Anyway. For many years the schedule of investments showed that, among the various maturity dates, there was one single maturity date for which it literally held one single bond. I might have posted on that but I can't find the posting. It also had weird stuff in it like a holding of the Fidelity Ultrashort Bond Fund within the TIPS fund. Anyway. It really did. In among this long list of six-digit dollar numbers there was one line item for one single bond with a market value in the low four digits.

I succeeded in contacting the fund manager through the method of guessing email address patterns just to ask what the explanation was, but as expected he gave a cordial but uninformative reponses.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by JoMoney »

Has anybody pointed out that VAIPX is NOT an "index fund" ?
The management fees for 'active' funds (even the index-like conservatively managed ones) at Vanguard are generally higher (relative to Vanguard's index funds... but much lower cost than active funds elsewhere.)
The VTIP ETF (which is an index fund) is only .05%

There are other examples of bonds funds at Vanguard where the managed (non-index) fund has higher costs than the index version.
e.g.
Vanguard GNMA Fund Admiral Shares (VFIJX) ER: 0.11%
compared to the index ETF, Vanguard Mortgage-Backed Securities ETF (VMBS) ER: 0.04%
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jebmke »

exodusNH wrote: Tue Jan 18, 2022 8:06 am
jebmke wrote: Tue Jan 18, 2022 7:56 am
exodusNH wrote: Tue Jan 18, 2022 7:21 am
jebmke wrote: Tue Jan 18, 2022 6:34 am Maybe it is a scale issue. For any significant Tips allocation, there is really no compelling reason not to buy individual bonds. It is really easy to do.
I can think of two reasons.

With individual bonds, you wind up having to pay income tax on the inflation adjustments with external cash since you don't get those until the bond matures.

With TIPS funds, they pay out those adjustments which you can hold some back for the tax.

Individual bonds have a fixed maturity. You get the cash at date X regardless if you need it. If you need it earlier, you have to deal with the secondary market vs clicking "sell" with the fund.
Well, the processing of phantom distributions would certainly add to cost. I can't think of a compelling reason to hold Tips in a taxable account though so for me, that proposition isn't an issue. Buying and selling Tips adds one click to the cash flow process - no more no less. I don't hold cash so if I needed money, I have to sell something anyway.

I can see for very small holdings - say < $500K a fund is probably a sensible choice for convenience.
Heh. You and I have very different definitions of small. My house + taxable account aren't even $500k.
my total bond holdings are 7 figures and I consider myself a small investor. The bond market is quite large.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by alex_686 »

jebmke wrote: Tue Jan 18, 2022 7:56 am Well, the processing of phantom distributions would certainly add to cost.
What extra costs? Having done the the actual accounting for a TIPS in a mutual fund I am not exactly sure what you are referencing. There is a little extra tax work around it. Maybe 20 extra hours a year? It is all highly automated.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Da5id »

jebmke wrote: Tue Jan 18, 2022 8:23 am
exodusNH wrote: Tue Jan 18, 2022 8:06 am
jebmke wrote: Tue Jan 18, 2022 7:56 am
exodusNH wrote: Tue Jan 18, 2022 7:21 am
jebmke wrote: Tue Jan 18, 2022 6:34 am Maybe it is a scale issue. For any significant Tips allocation, there is really no compelling reason not to buy individual bonds. It is really easy to do.
I can think of two reasons.

With individual bonds, you wind up having to pay income tax on the inflation adjustments with external cash since you don't get those until the bond matures.

With TIPS funds, they pay out those adjustments which you can hold some back for the tax.

Individual bonds have a fixed maturity. You get the cash at date X regardless if you need it. If you need it earlier, you have to deal with the secondary market vs clicking "sell" with the fund.
Well, the processing of phantom distributions would certainly add to cost. I can't think of a compelling reason to hold Tips in a taxable account though so for me, that proposition isn't an issue. Buying and selling Tips adds one click to the cash flow process - no more no less. I don't hold cash so if I needed money, I have to sell something anyway.

I can see for very small holdings - say < $500K a fund is probably a sensible choice for convenience.
Heh. You and I have very different definitions of small. My house + taxable account aren't even $500k.
my total bond holdings are 7 figures and I consider myself a small investor. The bond market is quite large.
Ok, but on the average bogleheads member scale where this is being discussed $500K is surely not reasonably represented as a "very small holding".

Anyway to OP I also have VAIPX and am curious why the ER is higher than some other bond funds. But not very worried about that ER. Many the announced Vanguard effort to decrease ERs will hit this fund.
Last edited by Da5id on Tue Jan 18, 2022 8:41 am, edited 1 time in total.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by exodusNH »

jebmke wrote: Tue Jan 18, 2022 8:23 am
exodusNH wrote: Tue Jan 18, 2022 8:06 am
jebmke wrote: Tue Jan 18, 2022 7:56 am
exodusNH wrote: Tue Jan 18, 2022 7:21 am
jebmke wrote: Tue Jan 18, 2022 6:34 am Maybe it is a scale issue. For any significant Tips allocation, there is really no compelling reason not to buy individual bonds. It is really easy to do.
I can think of two reasons.

With individual bonds, you wind up having to pay income tax on the inflation adjustments with external cash since you don't get those until the bond matures.

With TIPS funds, they pay out those adjustments which you can hold some back for the tax.

Individual bonds have a fixed maturity. You get the cash at date X regardless if you need it. If you need it earlier, you have to deal with the secondary market vs clicking "sell" with the fund.
Well, the processing of phantom distributions would certainly add to cost. I can't think of a compelling reason to hold Tips in a taxable account though so for me, that proposition isn't an issue. Buying and selling Tips adds one click to the cash flow process - no more no less. I don't hold cash so if I needed money, I have to sell something anyway.

I can see for very small holdings - say < $500K a fund is probably a sensible choice for convenience.
Heh. You and I have very different definitions of small. My house + taxable account aren't even $500k.
my total bond holdings are 7 figures and I consider myself a small investor. The bond market is quite large.
I assure you that 7 figures is not a small investor.

$1.2M net worth in the US puts you in the top 10%.
$2.5M puts you in the top 5%.
$3.2M puts you in the top 4%.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by alex_686 »

JoMoney wrote: Tue Jan 18, 2022 8:12 am Has anybody pointed out that VAIPX is NOT an "index fund" ?
The management fees for 'active' funds (even the index-like conservatively managed ones) at Vanguard are generally higher (relative to Vanguard's index funds... but much lower cost than active funds elsewhere.)
The VTIP ETF (which is an index fund) is only .05%
I think this is off base.

The reason my VAIPX is not a index fund is because the TIPS market does not lend itself well to indexing. To be a index fund means following the index as closely as possible even when it does not make sense.

The TIPS market has relatively few homogeneous illiquid bonds. When trading you can often find bonds which have the same maturity date where one is relatively more expensive and another cheaper becuase of where the market is that exact moment.

I see the fund following the index generally. I am not seeing it make any active decisions.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jebmke »

alex_686 wrote: Tue Jan 18, 2022 8:31 am
jebmke wrote: Tue Jan 18, 2022 7:56 am Well, the processing of phantom distributions would certainly add to cost.
What extra costs? Having done the the actual accounting for a TIPS in a mutual fund I am not exactly sure what you are referencing. There is a little extra tax work around it. Maybe 20 extra hours a year? It is all highly automated.
Don't they have to process cash distributions for phantom interest?

I still think the scale issue is predominant. I'd have to look at average holdings but holding Treasuries in funds rarely makes sense for a larger holding.

Maybe someone should ask Vanguard; they probably know what is included in their costs for each fund.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jebmke »

exodusNH wrote: Tue Jan 18, 2022 8:39 am
jebmke wrote: Tue Jan 18, 2022 8:23 am
exodusNH wrote: Tue Jan 18, 2022 8:06 am
jebmke wrote: Tue Jan 18, 2022 7:56 am
exodusNH wrote: Tue Jan 18, 2022 7:21 am

I can think of two reasons.

With individual bonds, you wind up having to pay income tax on the inflation adjustments with external cash since you don't get those until the bond matures.

With TIPS funds, they pay out those adjustments which you can hold some back for the tax.

Individual bonds have a fixed maturity. You get the cash at date X regardless if you need it. If you need it earlier, you have to deal with the secondary market vs clicking "sell" with the fund.

Well, the processing of phantom distributions would certainly add to cost. I can't think of a compelling reason to hold Tips in a taxable account though so for me, that proposition isn't an issue. Buying and selling Tips adds one click to the cash flow process - no more no less. I don't hold cash so if I needed money, I have to sell something anyway.

I can see for very small holdings - say < $500K a fund is probably a sensible choice for convenience.
Heh. You and I have very different definitions of small. My house + taxable account aren't even $500k.
my total bond holdings are 7 figures and I consider myself a small investor. The bond market is quite large.


I assure you that 7 figures is not a small investor.

$1.2M net worth in the US puts you in the top 10%.
$2.5M puts you in the top 5%.
$3.2M puts you in the top 4%.
What is the average size of a bond investor. The Treasury market is quite large.

I have sold Treasuries in the secondary market many times. It takes one click to sell a Treasury bond. They are extremely liquid.

I would never hold Tips in a taxable account unless I had no tax deferred accounts and it was a small holding in which case I would use a fund or skip Tips altogether
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by VTI »

nisiprius wrote: Tue Jan 18, 2022 8:10 am 1) For what it's worth, the Fidelity TIPS Index Fund, FIPDX, has an 0.05% expense ratio, net and gross. Is it cheaper because of being indexed?

For what it's worth, it has in fact outperformed VAIPX since inception, 2.68% versus 2.62% as I write this. Roughly equal to the ER difference. Coincidence?

(Hmmm... nowadays Vanguard is only charging a $20 fee for non-Vanguard-non-NTF funds. (Counting on fingers)... if I believed that 0.06% difference was persistent, it would actually benefit me to switch to FIPDX... but it's worth more to me to get off my butt and return those too-small slippers to Land's End...)

2) Before FIPDX, Fidelity's TIPS fund was FINPX. It was actively managed and is now shuttered. The ER was something like 0.45% Anyway. For many years the schedule of investments showed that, among the various maturity dates, there was one single maturity date for which it literally held one single bond. I might have posted on that but I can't find the posting. It also had weird stuff in it like a holding of the Fidelity Ultrashort Bond Fund within the TIPS fund. Anyway. It really did. In among this long list of six-digit dollar numbers there was one line item for one single bond with a market value in the low four digits.

I succeeded in contacting the fund manager through the method of guessing email address patterns just to ask what the explanation was, but as expected he gave a cordial but uninformative reponses.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jeffyscott »

alex_686 wrote: Tue Jan 18, 2022 8:39 am
JoMoney wrote: Tue Jan 18, 2022 8:12 am Has anybody pointed out that VAIPX is NOT an "index fund" ?
The management fees for 'active' funds (even the index-like conservatively managed ones) at Vanguard are generally higher (relative to Vanguard's index funds... but much lower cost than active funds elsewhere.)
The VTIP ETF (which is an index fund) is only .05%
I think this is off base.

The reason my VAIPX is not a index fund is because the TIPS market does not lend itself well to indexing. To be a index fund means following the index as closely as possible even when it does not make sense.

The TIPS market has relatively few homogeneous illiquid bonds. When trading you can often find bonds which have the same maturity date where one is relatively more expensive and another cheaper becuase of where the market is that exact moment.

I see the fund following the index generally. I am not seeing it make any active decisions.
Then why do others run index funds? Fidelity and Schwab have TIPS index funds, both have ER's of 0.05%.

However, Vanguard's most recent report lists "Investment Advisory Services" as accounting for less than 10% of total expenses, so that doesn't seem to explain much of the difference. That would appear to be the item that relates to it being an actively managed fund, to whatever limited extent it actually is?

The biggest expenses are listed as "Management and Administrative", it's not clear if that would also include some of the extra costs associated with having an "active" fund manager?
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Geologist »

It's not a high expense ratio. A high expense ratio would be 0.5% or higher.

In any case, if you look in the Statement of Operations, investment advisory costs (in other words, managing the bonds) are probably not the major expense. It's probably administering the fund for the shareholders. I just checked...investment advisory costs are about 10% of total costs (so 0.01%). Handling the fund holders accounts is most of the cost.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by alex_686 »

jebmke wrote: Tue Jan 18, 2022 8:45 am Don't they have to process cash distributions for phantom interest?
Note, the "phantom income" paid is not in cash.

But no, not really. I know it is intuitive to think that there is a link between cash and distributions but there really isn't. They are primarily journal entries. The point of distribution is to generate "reportable transactions" so you can your income tax. If you think distributions are for anything else you are barking up the wrong tree.

Yes, days with distributions tend to have a high cashflow, but not weirdly high. And why would the level of distributions increase expenses? Once again, even if the fund manager has to liquidate holdings to meet that cash flow, trading expenses are not part of the expense ratio.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by tvubpwcisla »

.10 basis points seems like a pretty low ratio to me. Fidelity has some 0% funds if interested.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Geologist »

Someone mentioned Schwab and Fidelity's TIPS index funds with a 0.05% expense ratio. The difference in dollars and cents of their expense ratios and VAIPX is $25/year on a $50,000 account (the minimum for VAIPX). This is not a high amount.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jebmke »

Geologist wrote: Tue Jan 18, 2022 9:35 am Someone mentioned Schwab and Fidelity's TIPS index funds with a 0.05% expense ratio. The difference in dollars and cents of their expense ratios and VAIPX is $25/year on a $50,000 account (the minimum for VAIPX). This is not a high amount.
Hold it long enough and you'll have enough saved to buy your spouse a Lexus 350. :beer
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by exodusNH »

jebmke wrote: Tue Jan 18, 2022 8:45 am
alex_686 wrote: Tue Jan 18, 2022 8:31 am
jebmke wrote: Tue Jan 18, 2022 7:56 am Well, the processing of phantom distributions would certainly add to cost.
What extra costs? Having done the the actual accounting for a TIPS in a mutual fund I am not exactly sure what you are referencing. There is a little extra tax work around it. Maybe 20 extra hours a year? It is all highly automated.
Don't they have to process cash distributions for phantom interest?

I still think the scale issue is predominant. I'd have to look at average holdings but holding Treasuries in funds rarely makes sense for a larger holding.

Maybe someone should ask Vanguard; they probably know what is included in their costs for each fund.
I think scale has the biggest impact here. If you look at the annual report breakdown for expenses, you can see that BND's expenses per share class are nowhere near what you'd get by naively multiplying VAIPX's by the difference in size.

Unfortunately they don't break them down more than at the level of "Marketing and Distribution - Admiral Shares".
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by alex_686 »

jeffyscott wrote: Tue Jan 18, 2022 9:15 am Then why do others run index funds? Fidelity and Schwab have TIPS index funds, both have ER's of 0.05%.

However, Vanguard's most recent report lists "Investment Advisory Services" as accounting for less than 10% of total expenses, so that doesn't seem to explain much of the difference. That would appear to be the item that relates to it being an actively managed fund, to whatever limited extent it actually is?

The biggest expenses are listed as "Management and Administrative", it's not clear if that would also include some of the extra costs associated with having an "active" fund manager?
Becuase it sounds cool?

There is not some type of magic that goes behind the words passive index fund or active management. In my opinion the case for passive management of bond funds in general and TIPS funds in particular are weak. There are advantages and disadvantages with investable indexes for use in portfolio asset selection. A small homogeneous market does not lend itself well. Or at the very least doesn't offer many advantages.

I mean, I can make a weak argument for TIPS passive management. But I can't make a strong one.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jeffyscott »

exodusNH wrote: Tue Jan 18, 2022 9:39 am
jebmke wrote: Tue Jan 18, 2022 8:45 am
alex_686 wrote: Tue Jan 18, 2022 8:31 am
jebmke wrote: Tue Jan 18, 2022 7:56 am Well, the processing of phantom distributions would certainly add to cost.
What extra costs? Having done the the actual accounting for a TIPS in a mutual fund I am not exactly sure what you are referencing. There is a little extra tax work around it. Maybe 20 extra hours a year? It is all highly automated.
Don't they have to process cash distributions for phantom interest?

I still think the scale issue is predominant. I'd have to look at average holdings but holding Treasuries in funds rarely makes sense for a larger holding.

Maybe someone should ask Vanguard; they probably know what is included in their costs for each fund.
I think scale has the biggest impact here. If you look at the annual report breakdown for expenses, you can see that BND's expenses per share class are nowhere near what you'd get by naively multiplying VAIPX's by the difference in size.

Unfortunately they don't break them down more than at the level of "Marketing and Distribution - Admiral Shares".
If "scale" means the total assets in the fund, that does not seem to explain the ER. Vanguard Intermediate-Term Treasury Index is at 0.07% with about $14 billion in assets, VAIPX has about $42 billion. The managed Vanguard Intermediate-Term Treasury Fund Admiral has the same ER as VAIPX, it's assets are just $6 billion.

It seems like Vanguard has simply decided to set the ER where it is, unless you believe that it is merely coincidence that it costs the exact same amount in percentage terms to run the $6 billion treasury fund as it does to run the $42 billion TIPS fund.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by nisiprius »

alex_686 wrote: Tue Jan 18, 2022 8:39 am
JoMoney wrote: Tue Jan 18, 2022 8:12 am Has anybody pointed out that VAIPX is NOT an "index fund" ?
The management fees for 'active' funds (even the index-like conservatively managed ones) at Vanguard are generally higher (relative to Vanguard's index funds... but much lower cost than active funds elsewhere.)
The VTIP ETF (which is an index fund) is only .05%
I think this is off base.

The reason my VAIPX is not a index fund is because the TIPS market does not lend itself well to indexing. To be a index fund means following the index as closely as possible even when it does not make sense.

The TIPS market has relatively few homogeneous illiquid bonds. When trading you can often find bonds which have the same maturity date where one is relatively more expensive and another cheaper becuase of where the market is that exact moment.

I see the fund following the index generally. I am not seeing it make any active decisions.
Maybe it doesn't make sense, but Fidelity is able to do it: FIPDX Fidelity® Inflation-Protected Bond Index Fund, 0.05% ER

And iShares is able to do it: TIP, iShares TIPS Bond ETF (but ER 0.19%)

And PIMCO is able to do it: TIPZ, Broad U.S. TIPS Index Exchange-Traded Fund (but ER 0.20%)

And, of course, Vanguard is able to do it with short-term TIPS, VTIPX, Vanguard Short-Term Inflation-Protected Securities Index Fund (but ER 0.14%)

$40 billion in assets x 0.10% expense ratio means $40 million a year is being collected to pay for the fund. It does seem like a lot to me. I guess that's not accurate because $40 million is the total for all share classes, but still. And the fact that it's not an index fund means that there's a $50,000 minimum for Admiral shares, while the Investor class, VIPSX, has an 0.20% expense ratio.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by beyou »

Geologist wrote: Tue Jan 18, 2022 9:35 am Someone mentioned Schwab and Fidelity's TIPS index funds with a 0.05% expense ratio. The difference in dollars and cents of their expense ratios and VAIPX is $25/year on a $50,000 account (the minimum for VAIPX). This is not a high amount.
Well Vanguard is pushing us to transition to brokerage accounts, so I finally accommodated their request....
and then bought the Schwab fund to save 5 bps. Only downside is lack of fractional shares and relative ease
to invest exactly what you want to the penny in a fund vs ETF. But if not too OCD, you can live with a small difference in $ invested.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Northern Flicker »

gabefair wrote: Tue Jan 18, 2022 6:22 am I feel like the expense ratio for Vanguard's Inflation-Protected Securities Fund Admiral Shares (VAIPX) is much higher than it needs to be. Its currently at 0.10% but has always had only one holding. U.S. Government Inflation Protected Treasury Bonds.
It is actively managed. An ER of 0.1% is very low for an actively managed bond fund. I think the pertinent question is why doesn't Vanguard offer an intermediate-term TIPS index fund? I don't know the answer, but I suspect the fact that they recommend short duration TIPS has something to do with it. They did create a short-term TIPS index fund.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Northern Flicker »

jebmke wrote: Don't they have to process cash distributions for phantom interest?
Yes, but TIPS index funds do as well.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by vineviz »

alex_686 wrote: Tue Jan 18, 2022 8:39 am The reason my VAIPX is not a index fund is because the TIPS market does not lend itself well to indexing. To be a index fund means following the index as closely as possible even when it does not make sense.
If there's any evidence that Vanguard is adding any value through their "active" management of VAIPX, I've not seen it.

IMHO investors would be a lot better off if Vanguard switched to direct indexing and cut the fee in half.

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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Northern Flicker »

vineviz wrote: Tue Jan 18, 2022 7:57 pm
alex_686 wrote: Tue Jan 18, 2022 8:39 am The reason my VAIPX is not a index fund is because the TIPS market does not lend itself well to indexing. To be a index fund means following the index as closely as possible even when it does not make sense.
If there's any evidence that Vanguard is adding any value through their "active" management of VAIPX, I've not seen it.

IMHO investors would be a lot better off if Vanguard switched to direct indexing and cut the fee in half.

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I agree except I would change "a lot better off" to "better off".
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by TropikThunder »

jebmke wrote: Tue Jan 18, 2022 9:38 am
Geologist wrote: Tue Jan 18, 2022 9:35 am Someone mentioned Schwab and Fidelity's TIPS index funds with a 0.05% expense ratio. The difference in dollars and cents of their expense ratios and VAIPX is $25/year on a $50,000 account (the minimum for VAIPX). This is not a high amount.
Hold it long enough and you'll have enough saved to buy your spouse a Lexus 350. :beer
At $25/yr, just how long do you think it will take to pay for an Lexus 350? Or did you mean the matchbox car version.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Northern Flicker »

Willmunny wrote: Tue Jan 18, 2022 6:45 am Perhaps the scale issue is something with TIPS as opposed to nominal Treasuries, but it does seem odd to me that a Treasury bond fund or ETF isn't the lowest expense ratio product out there. For example, VGIT (Intermediate Treasury) has an expense ratio of 0.04 while BND has an expense ratio of 0.0035. This obviously is a very insignificant difference, these are both very good expense ratios, and it is actually getting better (BND used to be significantly lower in expense ratio if I recall correctly). I've just never understood the rationale for BND being lower in expense ratio.
VBMFX/VBTLX/BND is a much older fund with a much larger amount of assets in the fund, so there is an economy of scale. Also, transaction costs are not included in ER. I expect that VGIT has lower trading costs than the corporate bonds in BND, so I think VGIT likely is the cheaper fund of the two at present.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Wrench »

TropikThunder wrote: Tue Jan 18, 2022 8:16 pm
jebmke wrote: Tue Jan 18, 2022 9:38 am
Geologist wrote: Tue Jan 18, 2022 9:35 am Someone mentioned Schwab and Fidelity's TIPS index funds with a 0.05% expense ratio. The difference in dollars and cents of their expense ratios and VAIPX is $25/year on a $50,000 account (the minimum for VAIPX). This is not a high amount.
Hold it long enough and you'll have enough saved to buy your spouse a Lexus 350. :beer
At $25/yr, just how long do you think it will take to pay for an Lexus 350? Or did you mean the matchbox car version.
At $2 per month and 8% return per year, it would only take 70 years to generate about $80K. :moneybag :greedy
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by alex_686 »

vineviz wrote: Tue Jan 18, 2022 7:57 pm If there's any evidence that Vanguard is adding any value through their "active" management of VAIPX, I've not seen it.

IMHO investors would be a lot better off if Vanguard switched to direct indexing and cut the fee in half.
Let me mildly change that. What is the basis for your argument?

As Geologist points out, the portfolio management fee is 1 bps. That is basically as low as it can go. The high expense ratio is not coming from there.

In my opinion it is cheaper to run a closet index fund than a true index fund. You don't have to license the index and its name, etc. I also think it is better since you don't have to follow the index exactly. You can make rational short term deviations from it.

And I think your chart kind of proves it. They are basically running a index fund.

No, the problem is the expensive cost structure. Since the issue is not on the portfolio management side then the issue must be on the operations side. Vanguard runs a pretty tight ship so I would think it would be pretty hard to chop 50% of the expenses.

Sigh, I don't have time for this but the next logical step would be to start picking apart the various fund's annual reports to figure out where the extra expense is coming from.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by rockstar »

Looks like you're pretty much paying them almost the stated yield on these bonds. When I bought my 5 year TIPS, the stated yield was 0.125%.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Northern Flicker »

alex_686 wrote: In my opinion it is cheaper to run a closet index fund than a true index fund. You don't have to license the index and its name, etc.
...
No, the problem is the expensive cost structure. Since the issue is not on the portfolio management side then the issue must be on the operations side. Vanguard runs a pretty tight ship so I would think it would be pretty hard to chop 50% of the expenses.
vineviz wasn't pulling the 50% cost reduction out of the air.

VAIPX - actively managed TIPS fund ER 0.10%
FIPDX - TIPS index fund ER .05%
SCHP - TIPS index fund ER .05%

All are intermediate duration funds.

Also, without a $50K minimum investment, the ER of VIPSX, the investor share class is 0.2%.

I think the issue is inertia. When Vanguard started the fund, there was not enough of a secondary market for TIPS to be able to manage an index fund without tracking error from when securities would be available at auction. When Vanguard developed a TIPS index fund, it was a short-term index, which is how they recommend TIPS to be held, so they are not motivated to modify the intermediate fund.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jeffyscott »

Northern Flicker wrote: Wed Jan 19, 2022 1:20 pm
alex_686 wrote: In my opinion it is cheaper to run a closet index fund than a true index fund. You don't have to license the index and its name, etc.
...
No, the problem is the expensive cost structure. Since the issue is not on the portfolio management side then the issue must be on the operations side. Vanguard runs a pretty tight ship so I would think it would be pretty hard to chop 50% of the expenses.
vineviz wasn't pulling the 50% cost reduction out of the air.

VAIPX - actively managed TIPS fund ER 0.10%
FIPDX - TIPS index fund ER .05%
SCHP - TIPS index fund ER .05%

All are intermediate duration funds.
And if account is less than $50K it's 0.2% for VIPSX, the investor share of Vanguard TIPS fund vs. 0.05% for the alternatives.

Also note that Schwab has the same 0.05% for the mutual fund version of the TIPS index, SWRSX.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by alex_686 »

Northern Flicker wrote: Wed Jan 19, 2022 1:20 pm vineviz wasn't pulling the 50% cost reduction out of the air.
No, I didn't think he was.

If other funds can do it why can't Vanguard?

To be super-specific the reason why Vanguard can't cut it's ER is not because it is a actively managed fund. Assuming that going to a passive index would result in a 100% reduction of portfolio management expenses (which it would not) and would not increase any other expenses (which it would) then the ER would drop by 1 bps, or 10%. That is the best case scenario.

So we are still left with trying to find cost savings of 40%. Where do we find that? My gut is telling me that increase scale is the first place to look. The most bang for the buck. The second place would be to cut back on operation costs - such as reducing customer service office hours. But that is not going to yield much savings. The third option - well - a massive jump downwards it terms of bang for the buck.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Northern Flicker »

alex_686 wrote: So we are still left with trying to find cost savings of 40%. Where do we find that? My gut is telling me that increase scale is the first place to look.
We don't have to rely in gut hunches with scale as AUM data is available.

VAIPX/VISVX/VIPIX - $41.8B AUM
SCHP - $19.8B AUM
FIPDX - $11.7B

The Vanguard fund has much more scale to work with than the index funds.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by vineviz »

alex_686 wrote: Wed Jan 19, 2022 1:41 pm So we are still left with trying to find cost savings of 40%. Where do we find that? My gut is telling me that increase scale is the first place to look. The most bang for the buck. The second place would be to cut back on operation costs - such as reducing customer service office hours. But that is not going to yield much savings. The third option - well - a massive jump downwards it terms of bang for the buck.
Upon reflection I agree with your take on this. What we're observing is much more likely to be associated with the fixed costs of running a mutual fund at Vanguard instead of an ETF. I'm not sure what Vanguard's allocated costs are for customer service and record keeping, but they seem to be pricing their Admiral class funds as if there are fixed costs per fund of about $2 million. It'd probably require a 10x increase in AUM to get the fee down to match the ETFs from other providers.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Northern Flicker »

VTIP/VTAPX has $59.6B AUM, $15B in the mutual fund share class VTAPX. Vanguard is doing the recordkeeping and customer service for the quarter of assets in the mutual fund share class with an ER of 0.06%, while the ER is 0.05% for VTIP, the ETF share class. Offloading the recordkeeping to brokers for the ETF is saving 1bp for $45B of ETF AUM, slightly larger than the scale of VAIPX with its other share classes.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Northern Flicker »

Active management for corporate bonds or GNMAs is much more involved than active management for TIPS. Analyzing the credit quality of bond issuers, or analyzing prepayment risk and extension risk of particular GNMA passthrough securities. None of that applies to TIPS. Managing duration or a decision to include some nominal treasuries would be the knobs to twist for VAIPX.

VFIDX (intermediate-term credit) had an ER of 0.1% despite significantly more active management work, and $37B AUM across all share classes (less than the TIPS fund).

VFIJX/VFIIX (GNMAs) has an ER of 0.11% despite significantly more active management work, and an AUM of $23B.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by jeffyscott »

There's about 8 other Vanguard managed bond funds with the identical ER of 0.1/0.2% for admiral/investor.

Similar to what I said earlier, it seems highly unlikely that this is just a coincidence. It seems clear that the ER is what it is simply because that's where Vanguard has chosen to set it.

I didn't count them, but there's similarly a bunch of muni funds with identical ERs.
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by FreddieFIRE »

exodusNH wrote: Tue Jan 18, 2022 7:21 am Individual bonds have a fixed maturity. You get the cash at date X regardless if you need it. If you need it earlier, you have to deal with the secondary market vs clicking "sell" with the fund.
On those few occasions when I've sold an individual treasury prior to maturity, I've also only had to click "sell" to liquidate it. What am I missing here?
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Re: Why [does] Vanguard's VAIPX have such a high expense ratio?

Post by Robot Monster »

vineviz wrote: Tue Jan 18, 2022 7:57 pm
alex_686 wrote: Tue Jan 18, 2022 8:39 am The reason my VAIPX is not a index fund is because the TIPS market does not lend itself well to indexing. To be a index fund means following the index as closely as possible even when it does not make sense.
If there's any evidence that Vanguard is adding any value through their "active" management of VAIPX, I've not seen it.

IMHO investors would be a lot better off if Vanguard switched to direct indexing and cut the fee in half.

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Two minor quibbles. You seem to be using VIPSX in Portfolio Visualizer, which has double the expense ratio of VAIPX. Things look better when comparing VAIPX to SCHP rather than VIPSX.

CAGR from Jan 2011 - Dec 2021
SCHP 3.90%
VAIPX 3.87%
VIPSX 3.78%
PV Source

Also, SCHP has a duration of 7.7 years, while VAIPX is 7.5 years. Unsure how much that plays into the performance difference.

Oh, and just noticed SCHP had a larger max drawdown then VAIPX, -9.53% vs -9.39%.
Last edited by Robot Monster on Wed Jan 19, 2022 6:50 pm, edited 2 times in total.
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