The Rise Of An ETF Giant

July 20, 2012

When it comes to ETF brands, iShares has long been at the top of the heap. But will it last?


iShares has been a big player in the space since its initial product launch—originally branded as World Equity Benchmark Shares (WEBS)—in 1996.

Over the past decade, the firm has become synonymous with low-cost index funds, and offers passive index-tracking ETFs in everything from U.S. and international stocks to bonds and commodities.

The strategy has paid off: iShares is the largest ETF issuer in the world. And by a large margin, too. The San Francisco-based unit of BlackRock manages $488 billion, or about 41 percent of all U.S.-listed ETF assets. The No. 2 firm, State Street Global Advisors, controls about a quarter of the assets.

But a lot has changed since the old days. For one, the market has grown, with ETF assets now nearly $1.2 trillion today.

More importantly though, a single big threat to iShares dominance has emerged: Vanguard.

The mutual fund giant has elbowed its way into the exchange-traded fund world. It’s the No. 3 ETF firm by assets and, assuming present trends continue, it is clearly threatening to take over as the reigning ETF issuer.

A Changing Battlefield

We’ve written before about the threat Vanguard poses to iShares, but 2012 is shaping up to be the year when Vanguard surpasses iShares in a number of important pockets of the ETF market where the two firms offer competing products.

The first big victory for Vanguard came in 2011, when the company’s MSCI Emerging Markets ETF (NYSEArca: VWO) overtook the iShares fund that tracks the exact same index, the iShares MSCI Emerging Markets Index Fund (NYSE Arca: EEM). While both are still big funds—they’re both over $30 billion—VWO has run away with the assets, and now has $14 billion more than EEM.

Since that victory, Vanguard’s growth has steadily continued.

The firm has overtaken more market segments iShares this year, becoming the biggest aggregate U.S. bond fund. The Vanguard Total Bond Market ETF (NYSEArca: BND) now has $17.64 billion, while the iShares Barclays Aggregate Bond Fund (NYSEArca: AGG) has about $15.5 billion.

Vanguard now also has the biggest high dividend yield fund, as the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) overtook the iShares Dow Jones Select Dividend ETF (NYSE Arca: DVY). VIG now has about $11.3 billion to DVY’s $10.65 billion.

Looking at flows data from this year, Vanguard is gaining even in segments where iShares holds the lead. Vanguard’s MSCI EAFE ETF (NYSEArca: VEA) has gained more than a billion dollars this year, while the iShares fund tracking the same index (NYSEArca: EFA) has lost more than $2 billion. Still, EFA remains the far bigger fund, with almost $34 billion in assets, compared to $8.35 billion for Vanguard’s VEA.

In other cases, Vanguard is cementing a lead it has already established: Vanguard’s Utilities ETF (NYSEArca: VPU) has gained $100 million this year, while iShares’ (NYSE Arca: IDU) has lost $68 million. VPU now has $1.19 billion and IPU is an $735 million fund.


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