New Vanguard Europe Pacific ETF Is Much Cheaper Than the Competition

Buy the world for 15 basis points (0.15%).

That's the pitch for the new Vanguard Europe Pacific ETF, which began trading on the American Stock Exchange (Amex) today under the ticker symbol VEA. The new ETF is a share class of the Vanguard Tax-Managed International Fund, a long-standing Vanguard mutual fund that holds $2.3 billion in other share classes. The fund is tied to the MSCI EAFE Index, a broad-based international index that is also the underlying index for the iShares MSCI EAFE (EFA) ETF, the second-largest ETF in the world, with $47.7 billion in assets.

The biggest (but not the only) difference between the two funds is the expense ratio: VEA charges 0.15% while EFA charges 0.35%. That 20 basis point (0.20%) difference is a huge gap in pricing. If all of those assets shifted from EFA to VEA, investors would save somewhere around $95 million in annual fees on the expense ratio.

Of course, expense ratio isn't the only metric. Different fund companies provide different kinds of support, and advisors and investors have many reasons to buy one fund over another. In addition, as covered extensively here, the fact that VEA is a share class of a tax-managed fund means that it will make certain trading decisions that won't occur in EFA. Mainly, Vanguard will sell losers as a way to lock in capital losses for the fund, where appropriate. Some investors may worry that this will call VEA to deviate from its benchmark. In truth, however, the tracking error of the Vanguard fund has been very small: through April, EFA had come closer to tracking the benchmark over the past year, but VEA had come closer over the past 3- and 5-year annualized period.

click to enlarge

Vanguard has really been putting the pressure on the ETF industry on the fee front. Its Emerging Markets ETF (VWO) charges just 0.30%, compared to 0.75% for the competing iShare, and its bond funds are priced lower as well (0.11% vs. 0.15-0.20%). Those moves have helped Vanguard become the third largest ETF provider by assets, and they've clearly got their eyes on more.

The prospectus for VEA is available here.