I have a Vanguard roth IRA and a money market amount. If I remember correctly, there was either no fee or a very small fee to start it up. since starting it, I havent had an other fees incurred. Where does Vanguards income come from?

fees

Quoted: I have a Vanguard roth IRA and a money market amount. If I remember correctly, there was either no fee or a very small fee to start it up. since starting it, I havent had an other fees incurred. Where does Vanguards income come from?

(1)
i don't know what fund, if any, you are holding inside your Roth IRA account, but let's use for example Vanguard's VTSMX "Total Stock Market" index fund.
by clicking
finance.yahoo.com/q/pr?s=VTSMX
you see under "FEES & EXPENSES":
Total Expense Ratio: 0.19%

what does that "ER" mean?
annually, the fund managers take 0.19% of the funds holdings (including yours) as payment for doing whatever it is that they are doing to hopefully make the fund money -- including trading stocks, bonds, options, whatever, and paying SG&A (selling, general, and administrative) costs (for example, advertising, salaries, benefits, rents, etc).   whatever is leftover is their profit.  

your goal as a mutual fund buyer is to seek funds with low ER's and with no up-front or back-end loads.  this minimizes what you pay the managers and maximizes your return.  

(2)
a money market account (aka money market fund) generates income (~=dividends) by holding treasury bills, treasury bonds, corporate bonds, and a number of other instruments.  the goal of a MMA manager is to keep the share price at $1.00, and pay any excess at the end of the month to the shareholders -- less a small percentage.  

let's inspect Fidelity's "Cash Reserves" money market fund:
personal.fidelity.com/gen/mflfid/0/316067107_dat.shtml

if you scroll down, under "Fees, Loads, Expenses"
you'll see
Expense Ratio as of 05/31/2001   0.4%

what this means is that Fidelity is taking 0.4% of the return as payment for doing the work of buying/selling the bills/bonds, sending you a statement, giving you a website, etc etc etc.   whatever is leftover after their expenses is their profit.  my guess is that they are making about 0.1% (100 basis points) in profit.  

that doesn't sound like much, but then again this fund holds a few billion dollars.  do the math.  

ar-jedi

Quoted: snip

Thanks alot, I always wondered what the E.R. was.

Quoted: Quoted: snip Thanks alot, I always wondered what the E.R. was.

one more note on ER's.  

there is no set benchmark for ER's, no rule of thumb you should live by.

for index funds, which are completely computerized and require very little human work, the ER can be staggeringly low -- as demonstrated by Vanguards index funds.  Fidelity is giving them some competition in this low cost index fund area now.

in the middle are typical managed funds, which usually run about 0.6% to 1.00%.

at the top end of the scale are international funds.  because of the additional expenses associated with trading on foreign exchanges, and additional expenses for currency hedging, it is not unusual to see ER's in the 1.00% to 1.25% region.  

at the stupid end of the scale are funds that charge more than 1.5% -- they had better be giving you stupendous returns AND oral sex for that kind of ER.

summary:

(1) when comparing ER's -- compare apples to apples.  for example, do not compare an index fund with an international fund.  these are two different animals with two different cost structures.  

(2) the higher the ER, the more money is "leaking" from your account into the mutual fund manager's pocket.  the leak, while seemingly small, adds up and over the long term and dramatically LOWERS YOUR TOTAL RETURN.

ps:
ETF's have ER's as well.

ar-jedi

VOLUME!

(1) when comparing ER's -- compare apples to apples.  for example, do not compare an index fund with an international fund.  these are two different animals with two different cost structures.  



good stuff ar, more helpful than my implied RTFM i say, (read prospectus)

but expenses ratios are not expense ratios? aren't you paying all the same?

Quoted: but expenses ratios are not expense ratios? aren't you paying all the same?

well, yes and no.

say we have $10K to invest.  you first settle on an allocation appropriate for your age and risk level...  

for example,
80% = $8000 in stocks
20% = $2000 in bonds / money market

now within our stock holdings, we further subdivide as follows,
70% = 0.7 x 8000 = $5600 in domestic equities
30% = 0.3 x 8000 = $2400 in international equities

so we have decent exposure to international markets, protecting us against a falling dollar and taking advantage of the fact that the world's markets don't all rise and fall in unison -- the latter should make our yearly returns less volatile.

now we have to find funds that meet some criteria.  for the domestic part, we could use a single "go-anywhere" managed fund, or a total stock market index fund.  ditto for the international fund.  but how to find one, or more specifically, the right one?  it turns out that there is no "right" one, but we can find one that's "good enough".

in both cases, the criteria could look like,
- fund manager duration > 3 yrs
- ER < 0.85% domestic; < 1.0% international
- good tax efficiency
- good long term track record
- not too many eggs in one basket (for example, a fund full of energy companies)
- etc

as you can see, the ER figures in the determination but is not the sole factor in the decision.  the best solution comes about when you find an excellent, well run fund that has the attributes you want AND has a low cost structure and a correspondingly low ER.  

in domestic funds, there are many choices.  i have my favorites, FLVCX
in international funds, a very good place to start is DODFX.  

ar-jedi

disclaimer: i hold FLVCX and DODFX.

I realized my post had nothing to do w/ the original question.  

To simplify the above, either they are entitled to an annual percentage of the fund's holdings, or they are entitled to a margin on any earnings it makes...

Quoted: either they are entitled to an annual percentage of the fund's holdings

that's how 99.99% of mutual funds, ETFs, and money market funds work.  (*)

Quoted: or they are entitled to a margin on any earnings it makes...

that's how the majority of hedge funds work.

ar-jedi

(*) footnote:
now you see why there are two diametrically opposed forces at a mutual fund:
-- the shareholders want to close the fund at a reasonable size, because if it gets too big it's just an expensive index fund and becomes increasely unwieldy.  
-- the mutual fund company wants to increase the asset base, of which they take a fixed percentage of.  more assets = more income for them.  i'm cheating a little bit here as it is not at all unusual for the ER to *decrease* the bigger the fund gets.  to that end, the smallest funds usually have some of the largest ER's.  

Quoted: Quoted: but expenses ratios are not expense ratios? aren't you paying all the same? - ER < 0.85% domestic; < 1.0% international

that's my point.  .85 is .85

maybe it's more accurate to say when comparing expense ratios, compare with same type of specific funds, ie. SP500 index to SP500 index, (large) international index to (large) international index.

(if anyone is still confused reread the previous post)

good post tho