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Vanguard Cuts Prices on ETFs, Following Arrival of a No-Fee Competitor

The race to the bottom in the ETF price wars took another significant step this week, as SoFi registers two new ETFs with waived fees and Vanguard shaves basis points off a number of its own.

Vanguard Group cut management fees for 10 exchange traded funds, one day after a new manager filed for two ETFs that waive their 19 basis point fees until at least March 2020.

In its annual prospectuses filed Tuesday with the Securities and Exchange Commission, Vanguard reported lower expense ratios for 10 ETFs, including its popular world stock ETF and a host of ETFs used for international exposure.

In some cases, the ETF price reduction brings the cost of these portfolios below what Vanguard charges for the Admiral Share class of mutual funds for the same portfolios, as pointed out on Twitter by Morningstar ETF analyst Ben Johnson. 

ETFs account for roughly 20 percent of Vanguard's assets but have garnered more than 35 percent of Vanguard’s net cash flow over the past three years, according to the company. Retail investors purchasing ETFs on Vanguard's brokerage platform are largely buying and holding the funds, a spokesperson for the company said. In 2018, roughly half of our retail brokerage participants that hold ETFs didn't place a single trade, and the buy-to-sell ratio for trades was 3-to-1.

Vanguard and a few other money managers dominate the ETF market. BlackRock Inc., State Street Corp. and Charles Schwab Corp. control 60 percent of the $3.7 trillion market in U.S. ETFs, and Vanguard manages another 26 percent.

Social Finance Inc., the online lender known as SoFi, is launching two new ETFs and waived its 0.19 percent management fee for them until March 27, 2020, according to regulatory paperwork filed with the SEC on Monday.

A fund manager reducing its fees the day after a competitor signifies the price war being fought by asset managers in ETF land. Investors are increasingly seeking out the cheapest exposures, particularly in the broadest slices of the market. 

In what one analyst called “a shot across the bow at Vanguard,” Fidelity Investments heightened pressure on other fund managers when it reduced fees on some existing index mutual funds and, more dramatically, eliminated management fees entirely for two new ones in August.

Observers and media have dubbed the lowering of fees as a “race to zero,” but money managers aren’t in a hurry to voluntarily surrender fee revenue unless they have to. Free funds are loss leaders for issuers, which are betting customers attracted by the low-cost offerings will eventually buy more expensive funds or services, or perhaps the firms will look to profit off of security lending or selling order flow to other firms.  

In addition to management fees, commission-free ETFs have also become popular and an in-demand product by financial advisors. Charles Schwab plans to add exchange traded funds by BlackRock's iShares and other asset managers to its Schwab ETF OneSource platform, doubling the number of commission-free ETFs available to investors to more than 500. BlackRock's iShares funds were not previously available on the OneSource platform, which is made up entirely of commission-free ETFs. In July, Vanguard announced its decision to eliminate commissions on 1,720 ETFs.

VWO - Vanguard FTSE Emerging Markets ETF – from 14 to 12 bps

VGK - Vanguard FTSE Europe ETF – from 10 to 9 bps

VPL - Vanguard FTSE Pacific ETF – from 10 to 9 bps

VEU - Vanguard FTSE All-World ex-US ETF – from 11 to 9 bps

VSS - Vanguard FTSE All-World ex-US Small-Cap ETF – from 13 to 12 bps

VYM - Vanguard High Dividend Yield ETF – from 8 to 6 bps

VT - Vanguard Total World Stock ETF – from 10 to 9 bps

VTEB - Vanguard Tax-Exempt Bond ETF – from 9 to 8 bps

BNDX - Vanguard Total International Bond ETF – from 11 to 9 bps

VXUS - Vanguard Total International Stock ETF – from 11 to 9 bps

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