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Vanguard Moves to Stop Arbitrage Trading in 9 International Funds with Redemption Fees

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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:

  • International Growth (VWIGX)
  • International Value (VTRIX)
  • International Explorer (VINEX)
  • Total International Stock Index (VGTSX)
  • European Stock Index (VEURX)
  • Pacific Stock Index (VPACX)
  • Developed Markets Index (VDMIX)
  • Institutional Developed Markets Index (VIDMX)
  • Emerging Markets Stock Index (VEIEX)

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.