Sometime before 2001, when the Vanguard Group was still mulling the idea of offering exchange-traded funds (ETFs), there were a lot more questions than answers. How would ETFs impact Vanguard’s mutual fund business? Would ETFs go against Vanguard’s philosophy of long-term investing? And how would investors react to Vanguard ETFs? Would they embrace them or reject them?
Fast-forward to today and many of these questions have found an answer.
Both retail investors and financial advisors have indeed embraced Vanguard’s ETFs. Assets ended June at $33 billion, an increase of 47 percent from year-end 2006. In July alone, Vanguard attracted $1.5 billion in ETF assets, bringing year-to-date cash flow to $9.4 billion and ranking the company second among all ETF providers. In other words, Vanguard ETFs are enjoying their best year ever.
“We’ve seen particularly strong interest in our broad market offerings, including Vanguard Total Stock Market ETF (VTI), Vanguard European ETF (VEA), Vanguard Total Bond Market ETF (BND) and the Vanguard Emerging Markets ETF (VWO),” explains Martha Papariello, principal of Vanguard’s advisor services unit. Assets are congregating to these funds because they substantially lower expense ratios versus corresponding ETFs.
As of mid-summer, the Valley Forge, PA-based firm offered 33 ETFs in a broad swath of asset classes.
Taking Aim at RivalsEarlier in the year, Vanguard took a significant step by adding fixed-income ETFs to its product menu. This was a particularly bold move since the bond category over the past few years has been dominated by rival Barclays Global Investors, manager of the iShares. Vanguard didn’t just launch bond ETFs based upon key Lehman indexes; it did so with expense ratios of 0.11 percent, practically half the cost of competing bond ETFs.
Likewise, the Vanguard Europe Pacific ETF (VEA), which follows a popular measure of international stocks, the MSCI EAFE Index, competes with an identical offering from iShares (EFA), but VEA invests in about 25 percent more securities than the competing product and has an expense ratio of 0.15 percent, or less than half the cost of EFA.
“The lowest of low expenses are seldom the deciding factor, but if you couple it with a competitive alternative ETF, then the nod goes to Vanguard,” says Katie B. Weigel, a planner at LongPoint Financial Planning in Concord, Mass.
Interestingly, Vanguard’s approach to the ETF marketplace is strikingly similar to its recipe for success in the index mutual fund business: Offer a core group of index funds in multiple asset classes with rock bottom expenses. As the asset growth indicates, the strategy seems to be working.