How The Big 3 ETF Issuers Got So Big

August 29, 2017




Such rock-bottom prices are possible because the company is client-owned; meaning, Vanguard's funds own Vanguard-the-company, rather than the other way around. As such, Vanguard-the-company must operate at-cost, and the resultant savings translate to lower expenses for Vanguard-the-funds.

"We're gratified fees have come down so meaningfully across the industry, and we feel we had a large role in that change," noted Powers. "The end winner, though, is the investor." 

Perhaps the biggest downside of Vanguard, however, is that its portfolio disclosure is lagged, with ETF holdings reported on a monthly instead of daily basis. That's within the guidelines of Vanguard's exemptive relief from the SEC, and the firm says that daily disclosures is not in the best interests of shareholders in index funds due to the possibility of frontrunning. That said, Vanguard's ETFs are extremely good at tracking their underlying indices, and the indices themselves—usually FTSE, MSCI or CRSP benchmarks – are easy enough to look up.

Now that iShares and State Street are aggressively matching—even undercutting—Vanguard on price, good benchmarks with low tracking error may be the firm's next biggest selling point, says Powers.

"Cost was a huge differentiator when you were comparing products at 5 bps versus 50. Now that it's more like 5 bps versus 6, investors should expand their focus beyond cost to the tracking skill of the underlying strategy, or the strategy itself," Powers added.


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