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Vanguard Broadens ETF Platform

Considered by some to be a latecomer to the ETF party, Vanguard yesterday beefed up its exchange traded fund and mutual fund offerings. The company that made its reputation with low-cost indexed investments said it will launch 19 new index funds and related ETFs over the next year, as well as an ETF that tracks its $91 billion Vanguard 500 Index Fund. In keeping with its philosophy of shaving costs for investors, the expense ratio on the 500 Index Fund ETF is a niggling 0.06 percent. “That’s going to feel more like a rounding error than a fee,” Morningstar analyst Paul Justice says. “When fund companies compete, investors win.”

Vanguard entered the ETF market in 2001, eight years after the security first appeared. Today it has about 12.9 percent of the $800 billion market, putting it in third place behind BlackRock’s iShares (47.9 percent market share) and State Street’s Spiders (24.4 percent), says Cindy Zarker, director of retail asset management practice at Cerulli Associates. Vanguard says its growth is booming; in the past year, ETF assets under management have more than doubled to more than $100 billion. The company’s stable of ETFs covers 46 bond and stock indexes. Bloomberg News says Vanguard is collecting half of every dollar heading into the ETF market. “They’re gaining an edge, a very slow but steady edge,” Justice says.

Although it lacked the advantages that first-to-market competitors hold, Vanguard has been competitive on expenses and is often the lowest-cost provider, Justice says. Of the 19 other ETFs that the company unveiled yesterday, the expense ratios range from 0.15 percent to 0.35 percent. The new mutual funds and their companion ETFs cover both S&P and Russell equity indices over broad categories; three new municipal bond funds and related ETFs are in the mix as well. Vanguard also offers ETFs based on FTSE and MSCI indices.

“They’re trying to keep advisors within the Vanguard brand,” Justice said. “They recognize that many people have a strong preference over which index their fund is tracking. It makes a lot of sense, because if you start using different indexes when you’re trying to fine-tune your exposure, you gain considerable overlap. Not everybody defines growth and value the same, nor do they define small-cap versus large-cap the same.”

Keeping costs low is the name of the ETF game this year. Last week Charles Schwab said it would cut expense ratios on six of its eight proprietary ETFs. In February, Fidelity eliminated commissions on 25 iShares ETFs. Some advisors see lower-cost ETFs as a way of adding value to portfolio management, says Dan Inveen, principal and director of research at FA Insight in Tacoma, Wash. “When market returns are in a more normal range, say, of 5 to 10 percent appreciation, costs do matter more significantly than when you’ve got a market environment that appreciates at double-digit rates,” he says.

Are the days of mutual funds numbered? Given that Vanguard manages almost $1.4 trillion in mutual fund assets, it’s hard to imagine such a segment going gently into the night. Zarker has her doubts. “It certainly could happen way down the road,” she says. “The reality is people still like active management. While certainly during the heart of the market crisis you saw ETFs really gathering a lot of assets, last year actively managed mutual funds also pulled in a lot of assets. … I think there’s room for both.”

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