Exchange Fees

Exchange fees are a type of investment fee that some mutual funds charge to shareholders if they transfer to another fund within the same group. Other fees shareholders may encounter include sales loads, redemption fees, purchase fees, account fees, 12b-1 fees and management fees.

Exchange fees are charged by management investment companies that allow investors to exchange or transfer shares from one mutual fund to another mutual fund managed by the company. Exchange fees are unique in that they only occur when an inter-fund transaction is requested. Mutual fund exchanges are discussed in a mutual fund’s prospectus along with the other fees an investor will pay with investment in the fund. Many mutual fund companies do not charge a fee for exchanging shares.

The opportunity to exchange mutual funds is often called an exchange privilege. Exchange privileges can be beneficial for investors seeking to shift mutual fund allocations based on market conditions. For example, an investor in a growth equity fund during a bull market may seek to exchange shares for a bond fund if their outlook becomes more bearish. Additionally, do-it-yourself investors may be able to automate fund exchanges at a specified target date in order to shift higher risk allocations into more conservative funds.

Mutual fund exchanges are generally a common practice that is allowed by most mutual fund companies with multiple fund offerings. However, the exchange transactions can require due diligence in order to complete. Most exchanges must be done through special request or with a registered representative. Some platforms will allow the investor to make fund exchanges easily online. Each trading platform and mutual fund account has its own way of handling mutual fund exchanges.

Fund exchange details can be found in a mutual fund’s prospectus. Often an exchange privilege will have no cost. However, exchanging shares may trigger taxation if a capital gain occurs. Tax requirements are most common in a fund-to-fund transfer, but converting share classes in the same fund is usually considered a non-taxable event.

Vanguard is one mutual fund company that has an open exchange policy among its mutual funds. The fee is minimal with specific provisions focused on prohibiting frequent trading, which keeps an investor from buying or exchanging shares into the fund over the following 30 days. The Vanguard Total Stock Market Index Fund provides more details on the firm’s exchange policy in its prospectus. Investors in the Vanguard Total Stock Market Index Fund could easily exchange shares from the fund into a more conservative bond fund for greater security.