Ultra-low prices. Increasing market share. Frustrated competitors.
Those category-killing attributes make Vanguard Group Inc. the Wal-Mart of exchange-traded funds. Since 2010, its market share has grown from about 15 percent to 20 percent, while that of its big rivals, BlackRock's iShares and State Street's SPDRs, has slightly declined. And while all three have gained new assets this year, Vanguard leads with $51 billion, or 32 cents out of every dollar invested in an ETF, up from 28 cents last year. It has seen 21 of its 67 ETFs grow by at least $1 billion in 2013. The unique structure and low cost of its products suggest the momentum will continue.
Vanguard's ETFs are “cheap and deep,” offering a lot of value per dollar. On the cheap side, its average ETF has an expense ratio of 0.14 percent, compared with an average of 0.39 percent for iShares and 0.35 percent for SPDRs. On the deep side, its average ETF holds 1,171 securities, compared with 312 for iShares and 308 for State Street. A $10,000 investment gets you a deep bench of 84 securities per dollar with Vanguard, 10 times the eight securities per dollar you get with iShares and State Street.
To be sure, part of that gap comes from the different product lines offered by BlackRock and State Street. Their lineups include more narrowly focused ETFs, which you'd expect to have relatively higher fees and fewer holdings. But generally speaking, a Vanguard ETF will hold more securities with a lower fee than a rival ETF with the same focus.
Vanguard, which manages $325 billion in U.S.-based ETFs, has two other big advantages over competitors. First, its ETFs are a separate share class of its mutual funds, a structure on which Vanguard has a patent valid through 2019. By pooling ETF assets with mutual fund assets -- total assets under management are $2.2 trillion -- Vanguard creates enormous economies of scale.
Second, Vanguard's mutual ownership structure means its fund investors are its shareholders. Unlike publicly traded BlackRock and State Street, it doesn't face any potential conflicts in balancing the interests of its fund investors with those of its stockholders. Without two masters to answer to, it can run its index funds and ETFs at cost in a relentless effort to trim its fees.
Lower fees make a big difference in returns over the long run. As Vanguard founder Jack Bogle explained on Bloomberg TV recently, if you assume the stock market returns 7 percent, the average investor in an actively managed fund would get a 5 percent return. The lost percentage points -- what Bogle calls "the cost of playing the market" -- go to financial middlemen through the fund's expense ratio and trading costs and commissions paid by the fund. Enter index funds, which in the same scenario give investors a 6.94 percent return, according to Bogle, thanks to very low fees and minimal trading costs.
Here are a few of the superstars from Vanguard’s lineup, and their 2013 feats.
Vanguard U.S. Total Stock Market ETF (VTI)
The first ETF Vanguard launched, back in 2001, VTI has grown by $12 billion to $37 billion as the U.S. stock market has surged. It offers exposure to 3,615 large-, mid- and small-cap stocks in the U.S. for a fee of 0.05 percent. Its largest competitor is the iShares Russell 3000 ETF (IWV) at $5 billion and a 0.20 percent fee.
Vanguard FTSE Europe ETF (VGK)
VGK has grown by $7 billion this year to become the largest Europe ETF, at $12.5 billion. After the SPDR S&P 500 ETF, It has the second-most-successful ETF by inflows in the second half of 2013 as investors use it to play the European recovery. VGK tracks 508 European stocks for a fee of 0.12 percent. Its biggest rival, the iShares MSCI EMU ETF (EZU), has $7.1 billion in assets and a 0.50 percent fee.
Vanguard Short-Term Bond ETF (BSV)
As investors look for a refuge from the threat of rising rates, BSV has attracted $5 billion in 2013, the most of any fixed-income ETF. That makes it the largest short-term bond ETF in the world, at $13 billion. It holds 1,754 short-term government and corporate bonds and charges an expense ratio of 0.11 percent. Its next-biggest peer is the iShares 1-3 Year Credit Bond ETF (CSJ) at $11.5 billion and a fee of 0.20 percent.
Vanguard Total Bond Market ETF (BND)
Despite losing $1 billion in assets this year, BND recently became the largest bond ETF in the world, at $16.9 billion. That marked the first time a non-iShares fund has ever topped the list. In contrast, the iShares iBoxx $ Investment Grade ETF (LQD), which used to be the largest bond ETF, has lost $9 billion.
Vanguard International Bond ETF (BNDX)
This is the most successful new ETF launch of the year, at $664 million in assets. It's the international version of BND and tracks 2,048 international bonds for a fee of 0.20 percent. The biggest rival ETF that holds all foreign bonds is the iShares JPMorgan USD Emerging Markets Bond ETF (EMB), which has $3.6 billion in assets and charges a fee of 0.60 percent.
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