Vanguard’s Rise To No. 2 ETF Firm Matters

The ongoing rise of Vanguard in the world of ETFs is a story that keeps giving investors a lot to cheer about.

We’ve long been expecting Vanguard, the low-cost pioneer in the fund industry, to pass State Street Global Advisors to become the second-biggest ETF sponsor, and now it’s just about a done deal.

As the table below shows, the company John Bogle built now has about $390 billion in ETF assets, or just $4 billion less than SSgA, the company that brought the first U.S. exchange-traded fund to market 21 years ago. One day of sizable outflows from that fund, the SPDR S&P 500 ETF (SPY | A-98) the world’s biggest ETF, would probably do it. So go ahead and hold your breath.

To be clear, ETF.com reporting on this change in the ETF League Table and interpreting what it all means isn’t about acknowledging bragging rights for Vanguard.

Nor is this a screed about how SSgA may have squandered a first-to-market advantage. SSgA is a perfectly credible ETF company, with some cutting-edge moves recently. Those include the rollout of a lineup of “Quality Mix” factor-focused ETFs as well as the launch of the now $605 million SPDR Blackstone / GSO Senior Loan ETF (SRLN | B), making it one of the most successful active ETF rollouts ever.

Instead, the reason we should all celebrate the rise of Vanguard and the rise of Vanguard ETFs is because it shows that investors are truly getting a fair shake. And it’s important to take measure of how Vanguard is spreading its influence throughout the world of money management.

Since its first ETF, the Vanguard Total Stock Market ETF (VTI | A-100), came to market in 2001, the company has steadily been climbing the ETF League Tables, even as its legacy open-end mutual fund franchise has continued to build assets.

The Vanguard Effect

To be sure, when you talk to folks at Malvern, Pa.-based Vanguard, they can come off full of bromides that can seem a bit smug. Here are a few examples:

“We’re not in the asset-gathering business; we’re in the wealth-generation business”; or even more annoying, “better, not bigger.”

What’s indisputable is that Vanguard is now the world’s biggest mutual fund company, with total assets of more than $2.3 trillion, and it’s now the No. 2 asset manager after BlackRock, parent company of the iShares ETF brand.

Vanguard has even passed Bill Gross’ Pimco as the world’s biggest manager of taxable fixed-income assets, according to a recent piece in Investment News.

So, Vanguard clearly is in the asset-gathering business, no matter what it says. But regarding the claim that it is really in the “wealth-generation business,” consider this:

Ned Johnson III, current head of Fidelity Investments, is, like Vanguard founder Bogle, toward the end of a remarkable career.

Johnson, thanks to successful products like the Fidelity Contrafund, can measure his success in billions of dollars. Bogle, the indexing pioneer and leader of the low-cost revolution in the world of investments, can measure his success in millions.

To be sure, Bogle can count himself among the rich. But why is it that he’s “just” a millionaire, and why is Johnson a billionaire? That’s a fair question considering that Vanguard manages quite a bit more money than Fidelity does these days.

More to the point, where did all that money that’s not in Mr. Bogle’s pocket disappear to? Vanguard investors.

A big portfolio like the Fidelity Contrafund costs as much 67 basis points a year to own, or $67 for each $10,000 invested. That’s a lot more than the 5-basis-point annual expense ratio on the Vanguard S&P 500 ETF (VOO | A-96). In other words, owning VOO, it would take you more than 13 years to pay what owning the Contrafund for one year costs.

Even Fidelity’s Spartan 500 Fund, a mutual fund version of the same portfolio, costs 10 basis points—twice as much as VOO, so the point still holds.

Forcing BlackRock’s Hand
Vanguard has been steadily climbing the ETF League Tables and inspiring others to go to-to-toe with it. It’s no exaggeration that BlackRock’s iShares unit, the biggest ETF company in the world, was really forced to launch its “Core” brand of ETFs almost two years ago to neutralize the Vanguard challenge.

The rollout of Core ETFs was a highly credible move by iShares—the asset flows into those products are a testament to that—but the real takeaway is that investors are getting a better deal than ever before. That’s another testament to Vanguard.

Everyone will be watching closely now as Vanguard ascends to being No. 2 in the world of ETFs. While we do, we really should be thankful that 40 years ago John Bogle thought the time was right to truly put investors’ interests first.

At the time this blog was written, the author held no positions in the securities mentioned. Contact Olly Ludwig at [email protected].