How Vanguard Admiral Shares Changed Mutual Fund Investing Forever

Image source: Vanguard Group.

The Vanguard Group is well-known for its commitment to minimizing costs. Its unusual fund management ownership structure makes fund shareholders the owners of the fund managers, removing a conflict of interest that many of Vanguard's rivals have and allowing fund management to work solely in the best interest of fund shareholders. In particular, the development of Vanguard Admiral Shares set an expectation in the industry that fund companies would pass on cost savings to investors, and in Vanguard's case, that has taken what were already low costs and made them even lower.

What Admiral Shares are

Vanguard Admiral Shares are a separate share class of Vanguard mutual funds. Originally, they were created to pass along savings that come about when fund shareholders invest larger amounts of money with a fund.

The success of Admiral Shares quickly became apparent in its impact on fund costs. Vanguard notes that Vanguard Admiral Shares expense ratios are on average 86% below the industrywide average for mutual fund costs. Specifically, Vanguard found that its average expenses were just $14 for every $10,000 invested in Admiral Shares annually, compared to more than $100 per $10,000 for the industry average. Moreover, Admiral Shares have a better than 50% cost advantage even over Vanguard's already low-cost standard investor share class of mutual funds.

How can you buy Admiral Shares?

Originally, it took substantial amounts of money to buy into any Admiral Shares fund class. Over time, however, the minimum investment amounts have fallen dramatically.

Vanguard currently requires minimum investments of $10,000 to qualify to buy Admiral Shares in most of its index funds and tax-management funds. Actively managed funds have a larger minimum investment of $50,000, and certain sector-specific index funds have even higher minimums of $100,00 to buy Admiral Shares.

Can you switch into Admiral Shares?

One common question that comes up is whether you can start out at Vanguard with regular investor-class shares and then move up to Admiral Shares when you've accumulated the required minimum. The answer is yes, and Vanguard makes it relatively easy, proactively performing eligibility reviews of your accounts to determine if you've reached the threshold to convert your existing shares to Admiral Shares.

Converting to Admiral Shares isn't as big a deal as you might fear. Because the Admiral Shares are simply a different class of shares within the same mutual fund, you can convert your existing holdings to Admiral Shares without having a taxable event. As a result, you won't have to report capital gain to the IRS on conversion, and your new Admiral Shares will carry over the tax basis of your old investor class shares.

Investors should note, however, that the share prices of Admiral Shares will differ from shares of other classes of the same mutual fund. You will therefore usually have a different number of shares after converting to Admiral Shares. However, the value of those shares will remain the same.

The downsides of Admiral Shares

One problem with Vanguard Admiral Shares is that the company doesn't offer them for all of its funds. Out of almost 120 funds, roughly 90 have Admiral Shares as part of their offerings.

However, most of the holdouts are concentrated in particular areas in which investor interest makes them less of a priority. For instance, several of Vanguard's money market funds don't have Admiral Shares, and some state-specific tax-exempt municipal bond funds also lack the Admiral offering. Vanguard's Target Retirement funds also don't have Admiral Shares of their own, and somewhat surprisingly, the holdings in other Vanguard funds that the Target Retirement funds have are in investor-class shares rather than Admiral Shares.

Despite their lack of universal availability, Admiral Shares set a standard in the industry for passing on cost savings to investors. Rather than keeping more money for a fund management company and its outside owners, Vanguard Admiral Shares keep the focus on the investor in a way that will add to your returns over the long run.

The article How Vanguard Admiral Shares Changed Mutual Fund Investing Forever originally appeared on Fool.com.

Dan Caplinger has positions in various Vanguard mutual funds and ETFs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.