Last week, my wife and I received a letter from Vanguard informing us that one of our mutual funds qualifies for conversion to “Admiral Shares.” For those that aren’t familiar with Admiral Shares, this is a very good thing. Here’s why:
“Admiral Shares are a class of Vanguard funds created to recognize and encourage the cost savings realized from large, long-standing accounts, and to pass these savings on to the shareholders who generate them. The ultra-low Admiral Shares expense ratios can reduce your investing expenses 18%â€“50% below the already low expenses of your Investor Shares.”
How much are the savings?
As noted above, the expense ratios on Admiral Shares are 18-50% lower than for Investor Shares. In our case, we’re talking about converting Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) into Admiral Shares (VTSAX). The Investor Shares have an expense ratio of 0.18% (which is already quite low) but the Admiral Shares will take this down to 0.09%.
While this doesn’t sound like a lot, that translates into an improvement in performance of nearly 0.1% each and every year. Over time, small differences in cost really add up.
How do you qualify for Admiral Shares?
Unfortunately, not everyone has access to Admiral Shares. In order to qualify, your account must:
- $10,000 for most index funds and tax-managed funds.
- $50,000 for most actively managed funds.
- $100,000 for certain sector-specific index funds.
Note that these limits are applied on a per fund/account basis. Thus, if you have multiple accounts, it’s possible that some shares will qualify and others won’t even if you hold the same fund in each account.
How do you convert shares?
Beyond offering rock-bottom expense ratios, Vanguard also takes a lot of the hassle out of investing, and Admiral Shares are no exception. According to the letter that we received, the conversion will take place automatically during their quarterly conversion process. In other words, we don’t have to do a thing. They’ll mail us a confirmation when the conversion is complete.
What are the tax implications?
Whenever you modify your holdings in a non-retirement account, it’s important to consider the tax implications. The good news here is that “conversions from Investor Shares to Admiral Shares of the same fund are tax-free.”
Hmmm… We’ll save money, we don’t have to lift a finger, and there’s no tax hit. What’s not to love?