How Low Can Vanguard Go?

by: Michael Johnston

Vanguard, the Pennsylvania-based provider of ETFs and mutual funds known for its low management expenses, has further enhanced the cost efficiency on its lineup of sector-specific ETFs. The company announced that the expense ratios on a handful of its sector funds have been cut to 0.19%, making them slightly cheaper than the popular lineup of Sector SPDRs and on par with several FocusShares ETFs. The Vanguard sector ETFs and their expense ratios are now as follows:

Ticker Sector ER AUM
VCR Consumer Disc. 0.19% $348
VDC Consumer Staples 0.19% $885
VDE Energy 0.19% $1,730
VFH Financials 0.23% $538
VHT Health Care 0.19% $725
VIS Industrials 0.19% $432
VGT Technology 0.19% $1,894
VAW Materials 0.19% $530
VOX Telecom 0.19% $366
VPU Utilities 0.19% $1,041

Each of the funds highlighted above will now be at least tied for the lowest expense ratio in their respective ETFdb Categories, except for VFH. There are two ETFs in the Financials Equities ETFdb Category that beat the Vanguard ETF in terms of fees; the Financial SPDR (NYSEARCA:XLF) comes in at 0.20%, while the Focus Morningstar Financial Services Index ETF (NYSE:FFL) comes in at just 0.19%

Sector SPDRs On Alert?

Though Vanguard is one of the largest issuers of ETFs in the world, its sector-specific funds are considerably smaller than some of their most direct competitors. VDE has a healthy $1.7 billion in AUM, but that’s only about a quarter of what the Energy SPDR (NYSEARCA:XLE) boasts. Currently, the nine Sector SPDRs have about $45 billion in aggregate AUM. Vanguard’s lineup of sector ETFs represents less than $10 billion in total.

Vanguard’s ETF presence grew considerably in 2011, thanks in large part to the cost efficiency of several popular products compared to more established competitors. Perhaps the best example of increased cost awareness among ETF investors is the comparison between Vanguard’s MSCI Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets Index Fund (EEM)–both of which are linked to the same index. At the end of 2009, EEM’s asset base exceeded VWO by approximately $20 billion. Since then, inflows to VWO have skyrocketed while EEM has experienced net outflows; the Vanguard fund now has close to $10 billion more in assets than its older and more established competitor.

Vanguard’s BND has also gained ground on iShares’ AGG recently. Both ETFs replicate the Barclays Aggregate U.S. Bond Index, but BND has a meaningful edge in terms of expenses. Through the first 11 months of 2011, inflows to BND exceeded AGG by about two-to-one. So there is some precedent for the cost efficiency of Vanguard ETFs attracting big inflows from investors compared to similar funds (it should be noted that Vanguard’s sector ETFs and the Sector SPDRs are linked to indexes that are similar, but not identical).

Of course, low expense ratios do not guarantee success in the ETF industry. FocusShares ETFs, which include some of the cheapest funds available, have been slow to gather assets so far. And a handful of other low cost products have struggled to gain traction over the year. But given Vanguard’s already large presence, it wouldn’t be surprising if these ETFs see meaningful growth in 2012.

Disclosure: No positions at time of writing.

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