Vanguard Launches Russell-Based ETFs

By Steve Dew,

Shutterstock photo

Vanguard, the Valley Forge, Pa.-based sponsor known for its low-cost ETFs, today launched seven new funds based on Russell indexes. The new funds represent the latest step in an ambitious expansion plan the third-biggest U.S. ETF company announced earlier this year.

Today's rollout follows by about two weeks the launch of the Vanguard S&P 500 ETF (NYSEArca:VOO) and eight other equity ETFs based on S&P indexes. The company's plans are aimed at having a broad lineup of Vanguard products that give different advisers who favor different indexes the tools they need.

In keeping with Vanguard's aggressive stance on expenses, the new funds carry annual expense ratios ranging from 0.12 percent to 0.20 percent; in other words, priced to undercut its main competitor, iShares.

Rick Genoni, the head of ETF product management at Vanguard, said in a telephone interview today that his firm's expansion into the heart of the ETF marketplace is designed to provide uniformity for investors building long-term allocations.

"If you're using Russell products to gain exposure to the U.S. equity market, then use Russell-based products uniformly," said Genoni. "You can use a product, like an S&P product, over an allocation built on MSCI indexes for tactical purposes. But when you're building a long-term allocation, use the same underlying benchmarks."

Genoni argued that mixing benchmarks in a single portfolio can result in unintended consequences for investors.

"That can create issues-either underlap or overlap in the markets. It's critically important to align the underlying benchmarks."

The new Russell-based funds, their tickers and their annual expense ratios are:

  • Vanguard Russell 1000 ETF (NasdaqGM:VONE), 0.12 percent
  • Vanguard Russell 1000 Value ETF (NasdaqGM:VONV), 0.15 percent
  • Vanguard Russell 1000 Growth ETF (NasdaqGM:VONG), 0.15 percent
  • Vanguard Russell 2000 Index Fund (NasdaqGM:VTWO), 0.15 percent
  • Vanguard Russell 2000 Value Index Fund (NasdaqGM:VTWV), 0.20 percent
  • Vanguard Russell 2000 Growth Index Fund (NasdaqGM:VTWG), 0.20 percent
  • Vanguard Russell 3000 Index Fund (NasdaqGM:VTHR), 0.15 percent

Taking Aim At iShares

Expense ratios is clearly the field on which Vanguard wants to fight the battle for investor dollars with iShares and other big ETF sponsors with competing products.

Genoni acknowledged that in terms of tracking the underlying Russell benchmarks, Vanguard's new products and iShares existing funds are broadly similar.

"So it comes down to costs. That's what separates Vanguard."

The new funds make Vanguard's line of equity-style investing ETFs, which already includes mega cap-, mid cap- and small cap-based growth and value funds, the largest in the industry.

Style investing is based on the theory that "growth" stocks, companies that expect to book above-average earnings, and "value" stocks, companies that trade at a low price relative to their fundamentals, can outperform the market.

The top holdings of the Russell 1000 Growth Index as of Aug. 31 were Exxon Mobil, Apple, and IBM. The top Russell 1000 Value Index holdings were Procter & Gamble, AT&T, and JPMorgan Chase.

State Street Global Advisors also offers a line of style investing ETFs that track Dow Jones indexes.

Vanguard's Expanding Universe

Vanguard has built its ETF platform largely on MSCI indexes, after a 2003 legal dispute with Standard & Poor's over licensing the S&P 500 and other Standard & Poor's indexes.

Earlier this year, however, Vanguard revealed plans for a total of 20 new ETFs, including an S&P 500 ETF. It said the funds would be based on a variety of indexes, including the Russell 1000, Russell 2000 and Russell 3000 indexes, not just those provided by MSCI.

Vanguard's ETF rollout, including municipal bond and real estate funds, will take place throughout the coming year, and Vanguard stressed that the new ETFs will cost substantially less than competing products.

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Copyright ® 2010 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: IWB , IWD , IWF

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