The Battle For ETF Supremacy: Vanguard Ready To Take On BlackRock

Includes: BLK, IVV, STT, VOO, VWO
by: Dave Dierking, CFA


Vanguard is currently the third-largest ETF provider ($360 billion in assets under management) behind BlackRock ($683 billion) and State Street ($386 billion).

Vanguard has dominated ETF cash flows thus far in 2014, attracting over $18 billion and almost 90% of all new ETF dollars.

ETFs that were created for people who wanted to trade more frequently are now attracting long-term passive investors who want to take advantage of their low cost and flexibility.

Vanguard has long been known as the low-cost leader in the mutual fund industry. If it has its way, it will soon be known as the leader in the ETF universe as well.

That title currently belongs to BlackRock (NYSE:BLK) and its iShares family of ETFs that currently manages just short of $700 billion. Right now, Vanguard sits in a distant third place, with $360 billion, but is rapidly approaching the second placed State Street (NYSE:STT) (and its popular SPDR ETFs), with $386 billion. The current trend in the marketplace is unmistakable, though. Investors are turning their collective backs on actively managed funds with their higher fees and largely inferior performance in favor of passively managed low-cost index funds. As more and more money gets poured into these funds and ETFs, Vanguard, with its prominent position in the marketplace as the low-cost index fund leader, has figured to capitalize on the trend.

ETFs began as a tool for more active traders with two primary advantages. The first is cost, where most ETFs charge less in expenses than their mutual fund counterparts. The second is liquidity, as ETFs can be traded throughout the day, whereas mutual funds get priced just once at the end of the day. Today, ETFs have grown in popularity among passive and retirement-focused investors due to their low cost, as they try to squeeze every ounce of return they can out of their investments. Vanguard pioneered the low-cost index approach decades ago, so it's no surprise that investors are flocking to its ETF products for this goal as well.

And now Vanguard is going for the #1 spot. Here are four reasons that I think it can get there.

Vanguard is leading on cost...

Vanguard is gaining traction in the ETF space in much the same way that it did in the mutual fund space - by providing investments at a lower cost than anybody else. And just like its mutual fund brethren, its low-cost leadership is demonstrated across the board. The Vanguard S&P 500 ETF (NYSEARCA:VOO) charges an expense ratio of just 5 basis points, but that's pretty much in line with other S&P 500 index funds (the iShares Core S&P 500 ETF (NYSEARCA:IVV) charges 7 basis points, and the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) charges 9). However, it's Vanguard's other offerings where the cost advantage is significant. For example, the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) charges 15 basis points, compared to the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) at 67 basis points.

Vanguard became the mutual fund king by using the lowest-cost model. It makes sense that it can achieve the same label in the ETF universe by utilizing the same strategy.

… and it's cutting fees even further

In late April, Vanguard announced that it was cutting fees on nine of its ETFs, including some of its largest ones like the Vanguard Total Bond Market ETF (NYSEARCA:BND), the Vanguard Value ETF (NYSEARCA:VTV) and the Vanguard Growth ETF (NYSEARCA:VUG). In February, the company also announced that it had reduced the expense ratios on five of its international ETFs, including the Vanguard Emerging Markets ETF.

Vanguard charges razor-thin fees to begin with, so a one basis point drop in the expense ratio may not seem like much, but in many cases, that one basis point represents a 10% decrease in fees charged. That commitment to increasing operating efficiency and passing the savings on to investors is what is making Vanguard such a threat to BlackRock.

Its expanding ETF presence

Vanguard has been steadily adding to its ETF lineup for years, and that expansion is going to continue, as the company has announced that it's going to launch five new international ETFs in Canada. That will bring its Canadian lineup to 21 ETFs, in addition to the 52 currently operating in the United States.

At the risk of sounding like a broken record, the new ETFs will be cost leaders as well, with expense ratios between 0.20% and 0.35%. That would bring the average management fee for the Canadian lineup to 0.22%. The ETF industry average is 0.80%.

Vanguard is dominating ETF cash flows in 2014

Here is where the story is most compelling. Consider the following facts related to Vanguard's ETF cash flows this year.

  • In the first quarter of 2014, Vanguard has inflows of $13.1 billion, or almost 90% of all U.S. ETF inflows.
  • Vanguard added another $5.5 billion in ETF inflows in just the month of April.
  • 5 of the top 7 ETFs for year-to-date cash inflows belong to Vanguard.
  • 6 of the top 8 ETFs for year-to-date cash outflows belong to either State Street or BlackRock.

Perhaps the most impressive part of this is that the folks at Vanguard say they aren't doing anything unusual to drum up business. It's pure organic growth that's coming from investors who like what Vanguard has to offer.


Vanguard could conceivably pass State Street yet this year if inflows continue, and there's no reason to think that they won't. The low-cost approach has been working for Vanguard for decades, so perhaps it was just a matter of time before this success translated over to the ETF space.

The industry-wide shift from mutual funds to ETFs, coupled with investor desire for the lowest cost possible is driving growth in the ETF industry in general and in Vanguard specifically. The only measuring stick really is where investors are putting their money, and cash flows in 2014 make the clear case that Vanguard is riding a tidal wave of momentum, while BlackRock and State Street are struggling.

It just might be time to crown a new ETF champion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.