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Will Low Cost ETF Strength Make Vanguard Top Asset Manager Soon?

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Since the launch of the first ETF almost 24 years back, the exchange traded fund industry has attained great heights. There are currently about 2,061 exchange traded products listed in the U.S., with almost $3.06 trillion in assets under management (read: ETF Asset Report: Developed Markets Rule in Q2).

Several strategies have emerged, including active management, smart-beta technique, thematic ETFs and many more. Some of these did see success and but many have failed to attract investors’ attention. But one attribute has been famous among investors since the start, i;e, investors’ craving for low expense ratio.

Why Cost Is an Important Factor

Consider an expense ratio of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow by a higher amount of $21,390. The difference between the returns will zoom on increasing the holding period.

Considering the same parameters, with an expense ratio of 0.1%, a fund of $10,000 will grow to $97,869 in 30 years (at the same 8% rate of return). The same fund will however grow to a much lesser value of $76,123 with an expense ratio of 1%. In the long run, cheaper funds can drastically outperform the expensive ones, at least when other factors remain constant.

Vanguard Breathing Down BlackRock’s Neck

So far, the lowest cost corner was ruled by Charles Schwab and Vanguard. But the price war among issuers aggravated lately with competition on the rise. Other players like BlackRock are also resorting to the fee cut route to grab market share (read: BlackRock Slashes Fees, ETF Price War Intensifies).

Whatever the case, thanks mainly to its low-cost products, new business in Vanguard is taking big strides. “Investors have sunk a net $1.3tn into Vanguard’s funds since the start of 2012, whereas BlackRock has drawn $762bn over the same period”, as per an article published on Financial Times.

Two years back, the average expense ratio of a Vanguard ETF was 0.14% compared with the industry average of 0.58% and BlackRock's average expense ratio is 0.32%. The average expense ratio of Vanguard’s U.S. asset-weighted fund expenses as a percentage of 2016 average net assets is 0.12%.

With BlackRock aggressively slashing expense ratios for many of its products, it is evident that BlackRock’s current average fees have come down a lot, but is still not near Vanguard. This is because, in a ‘race-to-zero’ Vanguard is also not sitting idle. As the price war heats up, Vanguard also enacted deep fee cuts.

The asset manager intends to broaden its global footprint by opening an office in Germany, and one in Mexico. It entered Shanghai in May, as per Financial Times (read: What Does the MSCI Inclusion Mean for China A Shares and ETFs?).

However, there is a different view as well. As per the chief executive of Create Research, it is tough for Vanguard to dethrone BlackRock. He added that “Vanguard would also be more vulnerable than BlackRock in the event of a market downturn, as passive funds account for three-quarters of Vanguard’s assets, compared with 63% of BlackRock’s. Given the huge weight of money in Vanguard’s passive funds, its asset base will suffer a disproportionate hit in the next bear market”, as per the article published on Financial Times.

ETFs in Focus

Below we highlight year-to-date asset growth of a few Vanguard ETFs that offers ultra-low costs.

Vanguard Total Stock Market ETF (VTI - Free Report) — 0.04% — $5.55 bln

Vanguard S&P 500 ETF (VOO - Free Report) — 0.04% — $8.89 bln

Total Bond Market ETF (BND - Free Report) — 0.05% — $2.81 bln

Vanguard Value ETF (VTV - Free Report) — 0.06% — $3.32 bln

Vanguard Mid-Cap ETF (VO - Free Report) — 0.06% — $1.58 bln

Vanguard Small-Cap ETF (VB - Free Report) — 0.06% — $1.76 bln

Vanguard FTSE Developed Markets ETF (VEA - Free Report) — 0.07% — $10.64 bln

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