No-load fund with a redemption fee?

From the Vanguard website:

Investment types: Can you explain the bolded part?

A “load” is generally a euphamism for a sales commission, which gets paid, directly or indirectly, to the salesperson (typically a broker) who sold you the security. In this case, the fee gets paid to the fund, not a salesperson, and benefits the fund and its other fundholders, not a salesperson.

While some funds have always had exit fees for short termers (who cost the fund more from an administrative services perspective and may disrupt the fund’s ability to deploy capital on a stable basis), more funds have implemented these fees lately in response to the “market timing” enforcement actions brought by the SEC. The problem was trades which funds permitted to be made shortly after market close which took advantage of foreign or other market results–these traders made in-and out same-day trades to capture the imbalance. Since the funds generally permitted this activity only for large customers, it was unfair to other fundholders. Exit fees for short-termers are one way to eliminate the temptation.

I concurr with **Humble Servant’s ** response. I usually hear these referred to as Short Term Redemption Fees (STRF). I’d like to add though that one year is an exceedingly long holding period and exceeds what I would normally consider a reasonable definition of “short term”. Most mutual funds that I’ve seen that impose a STRF require holding periods ranging between 7 and 30 days. There are some at 90 days. To date I have only come across one fund (other than yours) that required a one year holding period.

Thanks, much clearer now.

Ass For A Hat, Vanguard seems to use these terms on its “Domestic Stock - Industry-Specific” funds (which include a REIT fund). I just used it as an example because I couldn’t find the one I was actually looking at last night. By chance, I did find that one just now. It’s the Vanguard Emerging Markets Stock Index Fund, and it has a matching redemption fee:

Where long holding periods exist, there tend to be underlying long-term or illiquid assets not readily valued or sold in a reliable trading market–a $50M cap REIT may buy and hold, say, only 20 $2.5 million apartment properties, which are not easily disposed of–it may take 3-9 months to properly market and close the sale of an apartment complex. If a REIT gets $2.5M in net redemptions in a single day (because, for instance, the tax laws that favor real estate investments change overnight), that means it has to theoretically sell or refinance a complex that very day to get cash (extreme example of course because it will actually have a line of credit to support some reasonable % of redemptions). Same is true of foreign development assets and microcap or start-up ventures where no established highly liquid or reliable public market exists. Therefore, the rationale for long-term holding periods is that they are dictated by the nature of the underlying assets, and thorough disclosure of this particular holding period risk should be highlighted in the prospectus for the fund.

There are often longer holding periods in smaller private hedge fund investment vehicles for this reason–no one going into those deals should expect daily liquidity.

Always read the prospectus, folks–not all mutual funds are equally liquid.