To summarize, his argument is essentially that Vanguard's new
ETFs will be redundant with existing offerings from both Vanguard
itself and from competitors like BlackRock and State Street.
"[A]side from being able to tack on the S&P and Russell name on
their new funds, there doesn't appear to be much added benefit to
investors in launching these products," Dion writes.
I'm not so sure I agree.
Dion seems to be worried that Vanguard investors will accidentally
purchase both the Vanguard Large Cap ETF (NYSEArca:VV) and the new
Vanguard S&P 500 ETF, and thereby double up on exposure. While
you can never underestimate the capability of investors to make
mistakes, this seems extraordinarily unlikely. Investors already
have a lot of choices in the ETF space-there are, for instance, 42
large-cap ETFs-and we don't seem to worry about investors mixing
large-cap funds from iShares with similar funds from State Street.
A more legitimate concern is that Vanguard will fracture the
liquidity that exists in its core MSCI-based product lines, and
that, rather than having one set of highly liquid ETFs, it will
divide that liquidity across multiple products and investors will
end up paying higher trading costs in terms of spreads,
premiums/discounts and market impact.
This is a legitimate theoretical concern, and we'll have to see how
it plays out. But other companies have succeeded at having multiple
liquid ETFs covering the same asset class. iShares, for instance,
has $5 billion in the iShares Russell 1000 ETF (NYSEArca:IWB), $21
billion in the iShares S&P 500 ETF (NYSEArca:IVV) and $220
million in the iShares Morningstar Large Cap Core (NYSEArca:JKD)
ETFs. Investors don't seem to be suffering there.
Investors like having choice in index families-many advisers have
serious and well-founded opinions about which index family is
better-and the ETF industry can cater to those needs. Last time I
checked, choice was almost always an unmitigated good in investing,
unless you assume that investors are idiots who need to be coddled.
In the end, Dion's main point (I think) is that investors should be
more or less satisfied with the large-cap ETFs that exist. Let me
take the opposite side of that argument. There are a lot of things
that Vanguard does well, and having them push the envelope in terms
of quality will help improve this industry further.
The point that the media tends to focus on-lower costs-is just one
piece of it.
Another big piece is that Vanguard returns all the revenue from
security lending in its funds to its investors, while iShares
splits it 50/50 between investors and the company (and many other
issuers don't even disclose how they divide revenue).
Further, due to Vanguard's unique hub-and-spoke structure, in
some cases they've provided better quality index coverage than
The storied battle between iShares Emerging Markets ETF
(NYSEArca:EEM) and Vanguard's (NYSEArca:VWO) is the clearest
example. Because Vanguard ETFs are actually share classes of much
larger portfolios, they've been able to pursue full replication of
tricky indexes like the MSCI Emerging Markets index. That's given
Vanguard a 3.5 percent performance edge over the past 12 months-a
noteworthy difference between two funds that most folks would
assume are identical.
And that competition makes everyone stronger. EEM is a better fund
today-with 619 securities in it-than it was a few years ago, when
it would regularly have just a few hundred representative emerging
markets stocks in the portfolio.
It's not that Vanguard's funds are always better-they're not-but
the company does push some investor-friendly best practices that
can improve things for all investors. And that's why I like having
them in the game. And I think investors are smart enough to decide
for themselves whether they're looking for French Vanilla or
Slow-Churn Vanilla when comparison shopping, even in the most basic
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