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Subject:  Re: Soft dollar mutual fund fees? Date:  1/2/2004  10:37 AM
Author:  yobria Number:  11570 of 18064

Jesse,

Yes, your Vanguard index fund portfolio manager is soft dollaring, but it's less of a problem with such funds since they trade less, and have an index they must mirror (almost) exactly, which is an incentive to keep costs down. Yes, in the case of Vanguard index funds, esp large caps like the S&P 500, it probably isn't costing you much. Request an SAI (Statement of Additional Info) from your fund provider, which breaks out the commissions paid. Their prospectus won't disclose this.

And keep in mind, brokers also comp fund employees indirectly for trading with them. If your fund manager played any golf this weekend, or ate at a five star restaurant, there's a good chance it was courtesy of a broker. All perfectly legal, of course.

I have a bias toward stocks over funds for a few reasons, including the recent issues that have come to light: (late trading, soft dollaring, etc). But also for tax reasons- when a fund incurs a capital loss, I can't deduct it against my taxes. When I sell a stock and take a cap loss, I can. Fund cap gains, on the other hand, are passed through to shareholders, and I can't control them. Also, with stock trades costing $5-$7 these days, the low-cost diversification advantage of funds is diminished.

But don't get me wrong, if you don't have the inclination to pick stocks, Vanguard is a perfectly fine way to invest, especially in a retirement account. It's only when you move to high fee funds with a large amount of trading activity which don't track an index that abuses (naturally) occur.

Nick






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