What it means
When Vanguard launched its first exchange-traded funds in the early 2000s, it marketed them under the VIPERs label. They tracked broad market indexes, which means they aimed to match the performance of a defined group of shares instead of trying to beat it.
Over time, the company moved to calling them simply Vanguard ETFs. The appeal was the same as for other index-tracking products.
Investors could buy a diversified portfolio in one transaction, pay a low annual charge, and trade at any point in the day when the market was open. Unlike a traditional mutual fund, which is priced once a day, an exchange-traded fund has a live market price.
The original structure was unusual. The exchange-traded shares were set up as an additional share class of an existing Vanguard index mutual fund, so one pool of assets served both types of investor.
This gave the company economies of scale, though the details of fund structures differ and have changed over the years. The key cost measure for anyone buying such a product is the expense ratio, the annual fee expressed as a percentage of the amount invested.
Because index funds follow a rule instead of paying analysts to pick shares, the fee is normally much lower than for actively managed funds. Over decades, a small difference in fees can add up to a large difference in wealth.
Investors should also remember the other costs of owning an exchange-traded fund. There may be a dealing commission, depending on the broker, and a small gap between the buying and selling price of the shares, known as the spread.
These are usually minor for large, widely traded funds but can matter for frequent traders. For a non-finance reader, the main lesson is practical.
If you come across the name VIPERs in a statement or an old report, it refers to a Vanguard exchange-traded fund, and the right question is what index it tracks and what it costs.
In practice
Real-world examples.
Example
A young engineer wants to start investing $500 a month. He chooses a low-cost fund tracking a broad stock index, and he notes that the fund's early shares were once sold under the VIPERs brand.
Example
A financial planner reviews a client's old brokerage statements and finds a holding listed as VIPERs. She identifies it as an index exchange-traded fund and updates the client's portfolio report to show the current name and fee.
Example
A corporate treasurer investing surplus cash for an employee savings plan compares an index exchange-traded fund with an actively managed fund. The treasurer picks the cheaper option because the investment goal is simple market exposure.
Formula
Calculation
Annual fee in dollars = amount invested x expense ratio
This example uses assumed fee levels for illustration. An investor puts $100,000 into an index exchange-traded fund with an expense ratio of 0.10%. Annual fee = 100,000 x 0.0010 = $100. For comparison, an actively managed fund charging 0.50% would cost 100,000 x 0.0050 = $500 a year. The difference is 500 - 100 = $400 a year, or $4,000 over ten years if the balance stayed the same.Case study
Seen in the real world.
Larkspur Dental Group is an illustrative, fictional business whose owners invested $200,000 of surplus cash for the long term. A friend advised them to buy a managed fund charging 1.00% a year, while their accountant suggested a low-cost index fund of the exchange-traded type charging 0.10%.
The accountant showed the difference in a simple table. Over 20 years, assuming the same 6% return before fees and no further deposits, the cheaper fund would leave the owners with noticeably more money because less was lost to charges each year.
In this illustrative case, the owners chose the index fund. They also wrote a short investment policy stating how much they would hold and when they would review it, so that they would not be tempted to react to every market move.
Watch out
Common mistakes.
- Thinking VIPERs is a separate type of investment, when it was simply Vanguard's brand name for its exchange-traded funds.
- Choosing a fund on past performance alone, without comparing the expense ratio and what the fund actually holds.
- Assuming an index fund cannot lose money, when it will fall if the market it tracks falls.
Questions
People also ask.
Are VIPERs still sold today?
The brand name is rarely used now, and the funds are called Vanguard ETFs, although the products themselves continue to exist.
How is an exchange-traded fund different from a mutual fund?
An exchange-traded fund trades on an exchange throughout the day at a market price, while a traditional mutual fund is bought and sold at a price set once a day.
What does tracking an index mean?
The fund holds the same investments as the index, in similar proportions, so its return should be close to the index return less fees.
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