By Matt Hougan
Don Dion of TheStreet.com
Vanguard's decision to launch S&P and Russell ETFs are
essentially bad for investors.
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 (
) 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 (
), $21 billion in the iShares S&P 500 ETF (
) and $220 million in the iShares Morningstar Large Cap Core (
) ETFs. Investors don't seem to be suffering there.
Investors like having choice in index families---many advisors
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
In the end, Dion's main point (I think) is that investors should
be more-or-less satisfied with the existing 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
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 their competitors. The storied battle between iShares
Emerging Markets ETF (
) and Vanguard's (
), 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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