Vanguard: Cutting Expenses, Boosting Returns

With today's 3%-to-7% rates on money market and government bond mutual funds, the bite of expenses hurts. Mindful of how extra costs depress yields, The Vanguard Group is offering four no-load funds that cut expenses to the bone. The only catch with these Admiral funds: You have to invest at least $50,000. Still, says Don Phillips, publisher of Morningstar Mutual Funds, "they are a very good deal."

Admiral's expense ratio, which covers money-management fees and other costs, is a mere 0.15% of net assets. That compares with a 0.53% average for U.S Treasury money-market funds and 0.93% for U.S. Treasury bond funds, says Lipper Analytical Services.

That can add up to a big difference, even on the funds with relatively low expense ratios. For example, if you invested $50,000 in the Vanguard Admiral U.S. Treasury Money Market Portfolio, you would pay only $100 in expenses, compared with $450 in a comparable Fidelity Spartan fund. That assumes a 5% annual rate of return and a full redemption after one year. Of course, the Spartan fund requires only a $20,000 minimum.

The lower expenses help boost the return. The Admiral fund's seven-day yield was 2.98% on Feb. 10, while the Spartan fund's was 2.78%.

Vanguard introduced the Admiral funds last November in response to competition among low-cost fund providers. Fidelity has put a lot of marketing muscle behind its four-year-old Spartan funds, most of which have expense ratios ranging from 0.45% to 0.65% of net assets. Dreyfus, which launched the Basic funds last May, is waiving fees until Feb. 28, and possibly longer. When it reinstitutes fees, Dreyfus will limit the ratio to 0.45%.

FREE CHECKING. Admiral's 0.15% fee is permanent and applies to a U.S. Treasury money-market fund and to short-term, intermediate-term, and long-term U.S. Treasury bond funds.

How does Vanguard do it? Since the firm doesn't have the expense associated with servicing small accounts, it can keep its costs at rock bottom. "Vanguard is choosing to share considerably more of the potential profits with customers," says Phillips. Not a bad concept for yield hunters.

Before it's here, it's on the Bloomberg Terminal.