Vanguard Group realized a long-standing objective today with the
launch of an S&P 500 ETF and, true to its reputation in the
asset management industry as a low-cost provider, the Valley Forge,
Pa.-based firm's new exchange-traded fund will undercut direct
competitors by a third.
The rollout formally puts behind Vanguard a legal dispute it had
with S&P in 2003 over licensing of the S&P 500 index, and
amounts to an appropriate, if much delayed, dovetail to its
pioneering S&P 500 index mutual fund that began the indexing
revolution in 1976.
The Vanguard S&P 500 ETF (NYSEArca:VOO) will cost
investors 0.06 percent, or 6 basis points, in annual fees, compared
with 9 basis points for both the $68 billion State Street Global
Advisors' SPDR S&P 500 (NYSEArca:SPY) and the $22 billion
iShares S&P 500 Index Fund (NYSEArca:IVV). Time will tell if
VOO is able to poach investors from SPY, the world's biggest
"Three basis points is a big deal in this segment," Vanguard's
Rick Genoni, head of ETF development, told IndexUniverse.com. "We
already have clients looking to switch to this product; we've had
interest in this product for some time, but for legal reasons we
could only finalize it now. "
Today's fund rollout also includes eight other ETFs based on
S&P indexes that together amount to a full canvassing of the
U.S. equities investment landscape broken down by large-, mid- and
small-cap categories. The funds have the cheapest expense ratios in
The company hasn't yet rolled out 11 additional ETFs based on
Russell indexes that were part of its splashy product announcement
in June that we wrote about in a story called "Vanguard Drops Bomb
With S&P 500 ETF Plans."
Apart from VOO, the freshly launched S&P-based ETFs, their
tickers and prices are:
- Vanguard S&P 500 Value ETF (NYSEArca:VOOV), 0.15
- Vanguard S&P 500 Growth ETF (NYSEArca:VOOG), 0.15
- Vanguard S&P Mid-Cap 400 ETF (NYSEArca:IVOO ), 0.20
- Vanguard S&P Mid-Cap 400 Value ETF (NYSEArca:IVOV), 0.20
- Vanguard S&P Mid-Cap 400 Growth ETF (NYSEArca:IVOG), 0.20
- Vanguard S&P Small-Cap 600 ETF (NYSEArca:VIOO ), 0.15
- Vanguard S&P Small-Cap 600 Value ETF (NYSEArca:VIOV),
- Vanguard S&P Small-Cap Growth ETF (NYSEArca:VIOG), 0.20
Competing on price is central to Vanguard's strategy. As Matt
Hougan pointed out in his June blog "Who's Actually Making Money In
The ETF Industry?" Vanguard is now the third-largest ETF provider
in the world but is fifth in terms of profits, giving up in margins
what it's increasingly making up in volume.
Charles Schwab is the only other U.S. money management firm that
is so committed to offering low prices to its clients and, to that
extent, is in something of a price war with Vanguard. We wrote
about that in a story in June called "Schwab Declares Price War
With ETF Fee Cuts."
On that day, the San Francisco-based discount broker cut the
price on its Schwab U.S. Broad Market ETF (NYSEArca:SCHB) to 0.06
percent. It's as cheap as any fund in Schwab's product line, and
matches Vanguard's new S&P 500 ETF, which, again, is priced at
0.06 percent as well.
SCHB's more direct competitor, the Vanguard Total Stock Market
ETF (NYSEArca:VTI), is priced at 0.07 percent. Schwab's U.S.
Large-Cap ETF (NYSEArca:SCHX), a closer match to VOO in terms of
market capitalization, is priced at 0.08 percent.
Catering To Advisers
A recent Cogent research revealed that this year, for the first
time ever, that Vanguard trumped iShares in adviser loyalty. To a
certain extent, the success of some of its funds shows that playing
the price card can work. For example, the Vanguard MSCI Emerging
Markets ETF (
) looks likely to surpass the iShares MSCI Emerging Markets Index
Fund (NYSEArca:EEM) in terms of assets by the end of the year. VWO
costs investors 0.27 percent compared with 0.72 percent for
"We'll do extremely well with these products," Genoni said.
Vanguard has some $160 billion of assets tied to other S&P
products such as mutual funds, $86 billion of which are tied to the
S&P 500, he noted. "Adding ETF classes to our existing funds
helps our clients. It not only gives them added tax efficiency, but
it also helps the pool of assets grow."
Genoni said Vanguard's plans to offer ETFs based on different
indexes from S&P and Russell in addition to MSCI reflect its
aim to have a product line for as many advisers as possible.
"We recognize that some advisers have preferences for index
brand, and that's part of the driver here," Genoni said. "We
already offer MSCI-based products that are similar in size and
style, with similar methodologies, but the S&P ETFs are a
recognition of that [brand] demand."
Vanguard's reliance on MSCI indexes grew out of the now-resolved
licensing dispute with S&P.
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