Acquired fund fees and expenses
The SEC directs mutual fund companies to report the expense ratios of investment companies that are part of a fund's portfolio as "Acquired fund fees and expenses (AFFE)." These underlying investment companies can include other open end mutual funds (both in house funds and external funds) as well as variations of the exchange traded closed end fund: closed-end funds, exchange traded funds (ETFs), and business development companies (BDCs). As a response to this directive, S&P, Russell, and MCSI dropped BDC's from their respective indexes.
Vanguard funds and BDCs
The SEC is now requiring fund firms to include the underlying expense ratios of business development companies. Vanguard explains this reporting requirement as follows:
“Acquired Fund Fees and Expenses” are expenses incurred indirectly by the Fund through its ownership of shares in other investment companies, such as business development companies. These expenses are similar to the expenses paid by any operating company held by the Fund. They are not direct costs paid by Fund shareholders and are not used to calculate the Fund’s net asset value. They have no impact on the costs associated with fund operations. Acquired Fund Fees and Expenses are not included in the Fund’s financial statements, which provide a clearer picture of a fund’s actual operating costs."
Table 1. below subtracts the acquired fund fee and expenses from the reported expense ratio. The "Net ER" column in the tables show the ratio that reflects the expenses Vanguard directly charges for managing the fund. Business Development Companies are mostly small cap companies, so they are more prevalent in funds that hold investments in small cap stocks. Expense data is derived from fund prospectuses.
|Fund||Reported ER||Acquired Fees
|Explorer™ Value Fund||0.65%||0.09%||0.54%|
|Variable Insurance Fund Small Company Growth Portfolio||0.40%||0.01%||0.39%|
Vanguard fund of funds
Vanguard manages a number of equity and balanced mutual funds that are considered fund of funds. SEC regulations require the funds to report the acquired fund fees and expenses of the underlying portfolios. In the following table, we will subtract the acquired fund fee and expense from the reported fee. This results in the ratio that reflects the expenses Vanguard directly charges for managing the fund.
|Fund||Reported ER||Acquired Fees
|Diversified Equity Fund||0.41%||0.41%||0.00%|
|LifeStrategy Conservative Growth Fund||0.15%||0.15%||0.00%|
|LifeStrategy Growth Fund||0.17%||0.17%||0.00%|
|LifeStrategy Income Fund||0.14%||0.14%||0.00%|
|LifeStrategy Moderate Growth Fund||0.16%||0.16%||0.00%|
|Managed Payout Fund||0.42%||0.42%||0.00%|
|Target Retirement 2010 Fund||0.16%||0.16%||0.00%|
|Target Retirement 2015 Fund||0.16%||0.16%||0.00%|
|Target Retirement 2020 Fund||0.16%||0.16%||0.00%|
|Target Retirement 2025 Fund||0.17%||0.17%||0.00%|
|Target Retirement 2030 Fund||0.17%||0.17%||0.00%|
|Target Retirement 2035 Fund||0.18%||0.18%||0.00%|
|Target Retirement 2040 Fund||0.18%||0.18%||0.00%|
|Target Retirement 2045 Fund||0.18%||0.18%||0.00%|
|Target Retirement 2050 Fund||0.18%||0.18%||0.00%|
|Target Retirement 2055 Fund||0.18%||0.18%||0.00%|
|Target Retirement 2060 Fund||0.18%||0.18%||0.00%|
|Target Retirement Income Fund||0.16%||0.16%||0.00%|
|Variable Annuity Total Market Index Portfolio||0.19%||0.19%||0.00%|
One should note the variable annuity portfolios also incur added insurance company mortality expense risk and administrative expense charges.
- Business development company
- Closed-end funds
- Exchange-traded funds
- Expense ratios
- Fund of funds
- Mutual fund
- Mutual funds and fees
- Mutual funds: additional costs
- Ludwig, Ollie (March 5,2014). "S&P, Russell Ditch BDCs From Indexes". http://www.etf.com/sections/features/21428-sap-russell-ditch-bdcs-from-indexes.html?nopaging=1. Retrieved December 27, 2015.
- "MSCI Deletes Securities". June 25,2014. http://www.etf.com/publications/journalofindexes/joi-news/22469-msci-deletes-securities.html. Retrieved December 27,2014.