New technology is now enabling Vanguard to open a new path for retail investors in twenty of its index funds who wish to make exchanges. Currently shareholders in the funds have to take the tedious route of providing written instructions in order to move money between these index funds.

The changes will only affect retail investors with taxable accounts and are expected to be implemented in March. Investors in 401(k) plans and IRAs have long had the ability to make exchanges through the phone, said a spokesperson.

Not only should the change please shareholders, it may also reduce Vanguard's overhead as electronic requests are less expensive to fulfill than paper requests for exchanges.

Retail shareholders in the index funds had been prevented from making exchanges except in writing in order to protect their peers from the ill-effects of market timing. Shareholders of Vanguard actively managed funds have long had the ability to make exchanges this way.

Still, index-fund shareholders will remain more limited than shareholders in actively managed funds even after the change is implemented.

Exchanges in index funds will remain "blacked out" from 2:30 pm to 4 pm (Eastern time). That restriction is a response to data gathered by Vanguard that showed market timers prefer to make their changes in the final hours before the market close. Exchanges in actively-managed funds can be submitted throughout the day.

"Better technology to allow this to the retail investor," explained the spokesperson. The new technology is a desktop-based program that allows Vanguard personnel to better monitor shareholder account activity.

One long-time concern at the Valley Forge-Pennsylvania fund firm is that investors will take advantage of an easier method of redeeming shares to attempt to time the market and in the process harm other share holders.

The firm also has a two "round trip" per twelve month per shareholder policy that is effect for all retail accounts.

Vanguard officials say that the new exchange privilege is not expected to have any material impact on the investment management of Vanguard's index funds.

"We're confident that the stringent policy, coupled with the comprehensive trading activity controls and intra-day cash flow reporting that we've developed, will enable us to manage the portfolios in the same highly efficient manner as in the past and to match our benchmarks with a high degree of precision," said Gus Sauter, managing director, Vanguard Quantitative Equity Group.

In total, 20 Vanguard funds will adopt the new exchange privilege. The policy for the firm's 63 other funds will not change.  

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