These Vanguard Dividend Funds Just Got a Little Cheaper

The Vanguard Group has long been known for its emphasis on minimizing cost to investors while still delivering the high-quality fund offerings shareholders want. For dividend investors, the Vanguard Dividend Appreciation ETF has gained in popularity recently, so it came as welcome news for investors to find out that Vanguard has reduced the cost of the exchange-traded fund recently. Investors in other Vanguard dividend-related funds also saw reductions in expense ratios, and that will translate into more of the funds' total returns staying in shareholders' pockets in the future.

Data source: Vanguard Group.

How Vanguard's dividend offerings have kept costs low

Vanguard has done a good job of keeping most of its funds' expenses low, and the positive results for shareholders stem from numerous efforts. First, Vanguard uses a mutual ownership style for its funds in which the fund shareholders own the fund and hire Vanguard professionals for fund management, administrative oversight, and other back-office functions. Because Vanguard Group as an entity doesn't have outside investors beyond its fund shareholders, there's no additional layer of profit that fund expenses have to finance.

In addition, many Vanguard funds use passive investing models that help to minimize cost. Rather than paying for ongoing active fund management, funds like Vanguard Dividend Appreciation get entities to create indexes that the fund managers are then asked to track. That's a big part of why Vanguard Dividend Appreciation in particular has been able to keep expenses below the 0.1% and continues to make them less expensive for investors.

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What's behind the recent cost cut?

Reducing costs has been something that Vanguard has pursued aggressively. Over the past six months, Vanguard says that more than 225 mutual funds and ETFs at the company have cut their expense ratios. That's more than half of Vanguard's funds, and it compares to just 14 funds with increases over the same time frame. Vanguard estimates that the savings amounts to $337 million over that six-month period alone, and as Vanguard CEO Bill McNabb said, "Lowering costs can give our clients a better chance for investment success."

McNabb also explained how Vanguard has accomplished this difficult feat. He pointed to ongoing efforts to find cost-cutting methods, but as the CEO said, "We are also investing in people and technology to protect our clients' assets, help improve their fund performance, and serve them more effectively and efficiently." The end goal in Vanguard's view is to ensure that overall investing outcomes get better over time and help its customers reach their goals.

Not all cost cuts are good for investors

However, there are some situations in which a reduction in expenses reflects something that's an overall negative for shareholders. Like many fund companies, Vanguard uses incentive arrangements with some of its external fund managers, and that can result in greater pay when a manager outperforms the relevant benchmark return. What that means is that if a fund is doing well, then the manager can earn a higher percentage of assets as compensation, and that in turn can lift the expense ratio. By contrast, if a manager does badly, then the incentive payment will decline, leading to lower expenses. Yet the negative impact of falling total returns from a fund more than outweighs any benefit from slight reductions in expenses.

Nevertheless, Vanguard Group has historically done a good job of keeping costs down and passing savings through to its shareholders, and the most recent reductions to several Vanguard dividend funds are just the latest examples of what has become a regular occurrence for the popular fund family. Investors in Vanguard Dividend Appreciation ETF and other dividend funds can expect to see greater rewards in the future as a result of cheaper costs going forward.