How The Big 3 ETF Issuers Got So Big

August 29, 2017

Vanguard
AUM: $757B
Market Share: 25%

Vanguard is the closest thing the ETF industry has to a rock star. Its investors aren't just clients. They're fans.

That's because the second-largest issuer, with $757 billion in assets, has demonstrated consistent—even obsessive—commitment to putting its investors first. Indexing is a big part of that.

Like hipsters the world over, Vanguard was indexing before it was cool. State Street may have beaten Vanguard to the ETF table, but Vanguard actually invented the index fund back in 1976, when the company launched its Vanguard 500 Index Mutual Fund.

Today Vanguard has cornered roughly half the market for indexed products, with combined U.S. assets of nearly $4 trillion across 300 mutual funds and ETFs, as of July 2017.

Late To The Party

Yet Vanguard is still primarily a mutual fund company, and it was slower than State Street or BlackRock to embrace ETFs. In 2001, Vanguard launched its first two ETFs, the Vanguard Total Stock Market ETF (VTI) and the Extended Market ETF (VXF). By that time, State Street had already launched 20 funds and  iShares had launched 58. 

A slower start doesn't seem to have hurt Vanguard long term, however. Of the 70 ETFs the firm has launched, not a single one has ever closed, nor are any currently below $100 million in AUM. Indeed, 55 ETFs hold above $1 billion.

Diversification & Rock-Bottom Pricing
Vanguard's secret sauce is diversification. The company may not offer the broadest range of ETFs, but those it does sell have comprehensive portfolios that hold hundreds, sometimes even thousands of securities. Yet Vanguard's ETFs also exhibit extremely low tracking error and spreads; the widest Vanguard ETF spread is just 0.17%.

"We're big advocates for diversification; it's the only real free lunch in investing," says Rich Powers, head of ETF Product Management for Vanguard's Portfolio Department.

The other big reason for Vanguard's dominance is low cost. The company's ETFs carry bargain-basement prices, with an average expense ratio of just 0.11%, compared with 0.31 for SSGA and 0.36 for iShares.  

 

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