| Vanguard
Moves to Stop Arbitrage Trading in 9 International Funds
with Redemption Fees
IndexFunds.com Staff
May 8, 2003
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Vanguard announced it will levy a 2% redemption fee on sales
of shares held less than two months for nine of its international
funds:
The redemption fee will apply to all shares purchased on or after
June 27, 2003, and will be assessed on redemptions and exchanges
of shares out of the nine funds.
Vanguard said that arbitrageurs frequently use the firm's international
funds for short-term trading, which negatively impacts long-term
shareholders in the funds. Essentially, arbitrageurs attempt to
take advantage of pricing inefficiencies that result due to time
zone differences in international and domestic markets. This short-term
trading results in higher transaction costs for the fund, and
also results in lower tax efficiency.
"We believe that a short-term redemption fee will serve
as an effective means of ending this adverse trading activity,"
said Gus Sauter, managing director of Vanguard's quantitative
equity group. "Our primary concern is to protect the interests
of our long-term shareholders, by ensuring that fund returns are
not eroded by the exploitive actions of a few shareholders."
In early 2002, Vanguard instituted measures to curtail arbitrage
trading within its international funds, limiting shareholders
to two telephone or online exchanges out of a fund within a rolling
12-month period, and permitting telephone and online exchanges
of fund shares only until 2:30 pm Eastern time. Vanguard said
these policies - which still remain in place - did help to curb
some arbitrage trading, but that more stringent policies were
called for to thwart the practice.
Vanguard already charges redemption fees for its Tax-Managed
International fund (VTMGX)
to discourage short-term trading that could disrupt its tax efficiency.
