Institutional asset management has become a game of low-cost limbo, and Vanguard Group is moving the bar lower.  The Malvern, Pa., asset manager began offering very-low-cost “institutional select” share classes on six of its broadly diversified index funds in late June. The new share classes charge institutional investors expense ratios of just 0.01% to 0.045%, or $1 to $4.50 a year for every $10,000 invested.  The new share class is available only to institutional investors who invest at least $3 billion to $5 billion in a fund, compared with Vanguard’s “institutional plus” share class, instituted in 1995, which charges fees as low as 0.02% and requires minimum investments of $100 million to $200 million.  As of June 30, there was $2.8 billion in Vanguard 500 Index Fund Institutional Select Shares (VFFSX), $1.7 billion in Total Bond Market Index Fund Institutional Select Shares (VTBSX), $889 million in Extended Market Index Fund Institutional Select Shares (VSEMX), $671 million in Total Stock Market Index Fund Institutional Select Shares (VSTSX) and $535.8 million in Total International Stock Index Fund Institutional Select Shares (VTISX). Vanguard Total International Bond Index Fund Institutional Select Shares (VSIBX) had no assets as of June 30, according to Vanguard, which is currently transitioning institutional clients—mostly defined-contribution plans—into the new share classes.  Vanguard, owned by its funds’ shareholders, automatically lowers fees as funds grow. The new institutional share class is part of that effort to pass on cost savings created by larger accounts, says Morningstar analyst Kevin McDevitt.  “It’s definitely a small group of clients who could meet that kind of minimum,” he says, “and the cost of serving that institutional segment would be less.”  But the move also seems a challenge to Vanguard’s competitors, such as BlackRock Inc., BLK -0.54 % Charles Schwab Corp. SCHW 0.20 % and Fidelity Investments, to go lower with their fees.  It is possible that firms could at some point offer asset-management services, such as running index funds, as loss leaders, or products sold at prices that aren’t profitable, to attract customers to other products or services, says Mr. McDevitt. He notes that Vanguard is “managing at cost.”’  Daniel Wiener, editor of the Independent Adviser for Vanguard Investors, an independent newsletter that follows Vanguard funds, says he doesn’t expect the new share classes to draw new investors to Vanguard.  “This is really about bragging rights,” he says. “I don’t believe any institutional investor will be swayed to go to Vanguard to save one or two basis points if they haven’t already chosen Vanguard. If they had a reason not to be there in the first place, I can’t imagine that one basis point [0.01%] will make the difference.”  But the savings could matter to institutional investors in today’s cost-conscious environment, Mr. McDevitt adds. Even a difference in fees of 0.01 percentage point can mean a saving of $500,000 on $5 billion, he notes, and some institutions may invest much more.  “Institutional investors are looking more and more at what they’re paying in fees, especially if you’re talking about an index fund. Think about municipal pension plans; they’re taking a hard look at management costs today,” says Mr. McDevitt. “Yes, it’s small relative to the asset base, but I don’t think it’s entirely insignificant either.”  Ms. Maxey is a reporter for The Wall Street Journal in New York. Email her at daisy.maxey@wsj.com.  Vanguard Group’s very-low-cost “institutional select” share classes charge institutional investors expense ratios of 0.01% to 0.045%, or $1 to $4.50 a year for every $10,000 invested. An earlier version of this article incorrectly said $1 to $45 a year. (Aug. 8, 2016)
Vanguard creates a new share class for institutional investors, institutional select, with even lower fees than it charges for most institutional investors.