Dealing With Vanguard's Frequent Trading Policy

by Michael on Aug 22, 2013

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A reader named Max recently e-mailed to ask a question about Vanguard’s frequent trading policy. In his message, he wrote the following:

Hi. I have a quick question. I was just rebalancing some of our Vanguard mutual funds when I ran into a warning about their frequent trading policy. Apparently I can’t buy back into the fund that I was selling for 60 days. This isn’t a huge deal, and I understand why they do it, but do you know any ways around it?

While we don’t make many trades, I’ve actually run into this myself in the past. And, though it’s a bit unnerving to be told that you won’t be able to reverse course for 60 days, Max is right. It’s not a big deal. And the rule is there for a good reason.

What’s the point?

For starters, it’s important to keep in mind that Vanguard is a low-cost provider that primarily serves long-term, buy-and-hold investors. The goal of this policy is thus to discourage market timing, thereby minimizing the costs associated with fund management — which are passed on to people like us, reducing our returns.

How does it work?

The policy, as alluded to above, is triggered whenever you sell shares of a Vanguard mutual fund with a fluctuating share value (NAV). When you do, you’ll be greeted with a message similar to this:

This fund has a frequent-trading policy designed to protect the interests of long-term investors. You won’t be able to buy or exchange into any share class of this fund within this account by phone, web, or wire until XX/YY/ZZZZ. Information about our frequent-trading policy is available in the fund’s prospectus.

So you’re restricted from any convenient means of buying back in for 60 days. But this doesn’t mean that you can’t buy back in at all. In fact, you’re welcome to make investments by mail or via automatic purchases or exchanges.

It’s also worth noting that the restriction only applies to the specific fund(s) that you sold, and only in the account in which you did the selling. So if you sell in your IRA, you’re ability to buy in your taxable account in unaffected.

Working around the rule

So let’s say that you sold a certain fund and then had a change of heart — or perhaps you harvested some losses and want to cycle back to your original holdings after 30 days — what’s the easiest way around the restriction?

As noted above, you could send instructions via snail mail. Or you could set up an automated transaction, let it run once, and then cancel it. Such “one shot” auto-transactions are the closest you’ll be able to come to making an online trade.

You could also schedule the initial sale (or exchange) as an automated transaction. In this case, the transaction wouldn’t trigger the frequent trading policy, and you’d be free to buy back in at any time.

Note that there’s typically a day or so lag between when you set up the transaction and when it can first run, but it’s certainly better than writing a letter. Also: you can set the end date on the automated transaction to be before it runs the second time. Thus, you don’t necessarily have to log back in to cancel it when you’re done.

The other possibility is to simply ditch mutual funds in favor of ETFs, as the latter are not subject to the frequent trading policy in the first place. Or just be patient and avoid jumping in and out of funds on a rapid-fire basis.

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