ETFs at Center of Vanguard vs. Fidelity Dispute

It must be one of the oldest arguments in the history of mankind: who’s number one? Last year, we received regular updates on the status of the ongoing battle between General Motors and Toyota for the global sales crown (and more recently for the Cash For Clunkers crown). At present, this question is causing a great deal of tension in the mutual fund world, as the industry’s two largest players battle for the title of “world’s largest mutual fund company.”

And at the heart of the debate: exchange-traded funds.

Citing different calculations, both Fidelity and Vanguard make legitimate claims to being the industry’s biggest. If ETFs are included within mutual fund assets, Vanguard comes out on top. If ETFs are excluded, Fidelity is the winner.

The status of the ETF product lines of these two mutual fund giants highlights the growing importance of ETFs, as well as the widely-varying approaches fund managers have taken to these securities.

Vanguard, which was founded by legendary investor Jack Bogle, has fully embraced ETFs, and currently maintains nearly 40 funds with total assets of more than $66 billion. Two Vanguard products, the Total Stock Market ETF (VTI) and the Emerging Markets ETF (VWO), are among the largest and most heavily-traded ETFs in the U.S.

Fidelity, on the other hand, has only dabbled in the ETF space. The fund giant currently has only one ETF, the Fidelity Nasdaq Composite Index Fund (ONEQ), which has a market capitalization of just over $120 million. When ETFs are included in the total calculations, Vanguard edges fidelity by the narrowest of margins – $1.19 trillion to $1.17 trillion. When ETFs are excluded, Fidelity is well ahead.

The debate is an interesting one. While mutual funds and ETFs have many significant similarities, the rise in popularity of ETFs is largely attributed to their advantages over traditional actively-managed mutual funds. While there is a great deal of overlap (Vanguard is perhaps the best example), not all mutual fund companies offer ETFs, and vice versa. Vanguard spokesman John Woerth has an interesting perspective on the whole matter, noting that “excluding ETFs from the count would be like not counting the Prius in Toyota sales figures because it is a hybrid,” according to Rolfe Winkler at Reuters. Certainly an interesting analogy, although the implication on the state of the mutual fund industry is rather unflattering.

Although being the biggest and being the best are obviously not synonymous, there is a big advantage to being certified as the largest player in the space. This title can likely be used to recruit additional accounts, and perhaps charge higher fees, thereby increasing profits.

Disclosure: No positions at time of writing.

Comments

[baller:]

In it's "Fidelity Investor's Monthly" the lead story is about trading ETFs. An interesting take on a company that has only "dabbled" in ETFs.

Aug 30 08:55 PM

[fix:]

Fidelity's trading fees are comparable to discount brokers (from $8 to $19.95 per trade), so even if you don't trade the Fidelity ETF, they still make money (assuming you trade through them).

On Aug 30 08:55 PM baller wrote:

> In it's "Fidelity Investor's Monthly" the lead story is about trading
> ETFs. An interesting take on a company that has only "dabbled" in
> ETFs.

Aug 30 11:47 PM

[Fund Insider:]

"Although being the biggest and being the best are obviously not synonymous, there is a big advantage to being certified as the largest player in the space. This title can likely be used to recruit additional accounts, and perhaps charge higher fees, thereby increasing profits."

Additional accounts, maybe, higher fees, not in Vanguard's case.
Their key to success has been by keeping fees low. And in fact, I'd say even counting ETF's, Fidelity probably has more revenue than vanguard even with slightly lower assets, since they have so much more actively managed (read higher fee) funds.

Both good firms, all comes down to whether you want an index
manager or an active manager.

Sep 03 03:19 PM