Vanguard Ahead of ETF Curve
Investors can thank Vanguard Funds for helping to bring low-cost exchange-traded fund alternatives into the marketplace. As the ETF industry expands, Vanguard has become increasingly focused on selling ETFs. ETFs have been a driving force for the mutual fund giant, accounting for roughly 20% of net flows over the past year. The influx of assets has made Vanguard the third-largest ETF manager.
The growth of the ETF industry has spurred two separate phenomena. First, issuers have felt compelled to break new ground. In a bid to grab market share, they have created exotic or niche products. Individual country funds, made popular by iShares as early as 1996, are now common. In the quest to offer investors something different this summer, Van Eck launched the Market Vectors Vietnam ETF(VNM) while Global X debuted its FTSE Nordic 30 ETF(GXF).
ETF issuers also have tried to break new ground by making previously inaccessible markets like commodities and currencies available to the average retail investor. They have also given the average investor the opportunity to use leverage. Funds like the ProShares UltraShort Real Estate(SRS) and United States Oil(USO) give investors the ability to make the kinds of bets that were previously made almost exclusively by large institutions. (These can also expose investors to credit risk.)
The second phenomenon, which has been propelled by Vanguard, is the increasing number of new ETFs that seek to offer trusted strategies at a more affordable price. As ETF issuers lock horns, investors win. To learn how to take advantage of these low-cost strategies, check out my video:
Vanguard has been a pioneer in the low-cost ETF industry, sparking interest from other firms. Fixed-income giant PIMCO recently released two low-cost funds. The PIMCO 1-5 Year U.S. TIPS Index Fund(STPZ) and 1-3 Year U.S. Treasury Index Fund(TUZ) face off against iShares TIPs(TIP) and iShares 1-3 Year U.S. Treasury(SHY).
Asset manager Charles Schwab(SCHW) recently announced the launch of a series of new proprietary funds. The nine initial ETFs planned by Schwab are nearly identical to Vanguard’s core ETFs. This should come as no surprise to investors who have watched Schwab compete with Vanguard in the past: In May, Schwab cut the expense ratio of its Schwab S&P 500 Index fund (SWPIX) to 0.09%, less than that of the Vanguard 500 Index (FVINX) fund.
Vanguard’s success in duplicating popular ETF strategies at a lower cost has been a win-win for both issuer and investor. In an industry where first-mover status has always been important, Vanguard has proven that investors will always seek out a bargain.
The new wave exotic ETF strategies come at high costs to investors, both in a literal and figurative sense. While ETFs have traditionally been sought out as a lower-fee alternative to mutual funds, complex ETF strategies have high management fees.
The ETF industry continues to grow, and is reaching a new audience. New investors should prompt low-cost ETFs and help to increase liquidity. Vanguard has been ahead of the curve.
