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Vanguard Lowers but Still Defends Entry Fees

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VALLEY FORGE, PENN. - Index fund giant Vanguard Group lowered entry fees for a mid-cap and two small-cap funds. The Vanguard Mid-Cap Index Fund removed its .25% entry fee entirely, while the Small-Cap Growth and the Small-Cap Value Funds halved their entry fees from 1% to .5%. Economies of scale from growth in the funds have lowered transaction costs, say fund officials.

Should investors view entry fees as loads? Vanguard officials say no.

"With front-end loads, fund firms typically use the loads to cover sales commissions," said John Demming, spokesperson at The Vanguard Group. "These [entry] fees are for transactions and are paid straight to the fund to cover transaction costs to purchase stocks in the funds."

"What it does is pay for the cost of investing a new investor's cash in a fund," he said. "Without the fee, the existing shareholders in the fund would have to bear the cost of a new investor. Transaction fees are needed in order to be fair to shareholders. It's not fair for shareholders in the fund to pay the way of a new investor."

If there was no entry fee to cover transaction costs for new investors, these costs would result in a reduction of net dividends for the entire fund, Demming said. Net dividends are quarterly disbursements of capital gains, interest income and other income received from the portfolio, less transaction costs.

All three funds carry annual expense ratios of .25%, which are relatively low. The funds are all less than a year old but now range in size from $86 Million to $230 Million.

The company's official announcement can be visited at http://www.vanguard.com/cgi-bin/NewsPrint/920321039