Vanguard Plans To Shake Up ETF Industry

by on June 24, 2010 | ETFs Mentioned:

Vanguard, the Valley Forge, Pennsylvania-based firm known for its low cost mutual funds and ETFs, is planning a major expansion of its ETF product line. The company announced today that it plans to introduce 19 new index funds with ETF shares, as well as an ETF version of its popular Vanguard 500 Index Fund. Many of the proposed funds, which include products offering exposure to equities, bonds, and real estate, will compete directly with existing ETFs offered by other issuers. “We recognize that institutional investors and financial advisors may have a preference for certain benchmarks, and our goal is to offer them best-in-class funds and ETFs based on a choice of leading index providers, including FTSE, MSCI, Russell, and S&P,” said Vanguard CEO Bill McNabb in a press release. “Vanguard’s focus has been on developing a full array of stock and bond funds and ETFs to cover domestic and international markets and market segments. We are taking this logical next step to provide multiple options within the domestic stock markets and more choice for bond investors.”

Vanguard’s ETF Pipeline
Index Expense Ratio
S&P 500 0.06%
S&P 500 Value 0.15%
S&P 500 Growth 0.15%
S&P MidCap 400 0.15%
S&P MidCap 400 Value 0.20%
S&P MidCap 400 Growth 0.20%
S&P SmallCap 600 0.15%
S&P SmallCap 600 Value 0.20%
S&P SmallCap 600 Growth 0.20%
Russell 1000 0.12%
Russell 1000 Value 0.15%
Russell 1000 Growth 0.15%
Russell 2000 0.15%
Russell 2000 Value 0.20%
Russell 2000 Growth 0.20%
Russell 3000 0.15%

The 15 new equity ETFs Vanguard expects to roll out over the next year are based on well-known indexes already underlying some of the most popular exchange-traded products. The company has filed registration statements for funds tracking the value, blend, and growth versions of the S&P 500, S&P MidCap 400, S&P SmallCap 600, Russell 1000, and Russell 2000.

The last several years have seen a tremendous increase in the number of exchange-traded products. Including exchange-traded notes, exchange-traded commodities, and other ETF cousins, there are now more than 1,000 funds in the ETF Screener, nearly twice the amount in existence just two years ago. Much of the growth in the product line has been attributable not to duplication, but to innovation. First-to-market products to launch in recent years include sector-specific emerging markets ETFs, volatility ETNs, and hedge fund replication ETFs. Just this week, the first ETF offering exposure to mid cap Brazilian stocks hit the market.

Strictly from an index perspective, Vanguard’s upcoming push will be more duplicative in nature; each of the indexes underlying the 15 equity ETFs planned is already covered by at least one ETF [see all equity indexes covered by ETFs]. In addition to the ETFs presented in the adjacent table, Vanguard is also planning three municipal bond ETFs and an ex-U.S. real estate fund.

Price Wars Escalate

Vanguard is clearly hoping that cost-conscious investors will gravitate towards these new products; each of the proposed equity ETFs offers a lower expense ratio than existing products tracking the same index. Vanguard’s push into spaces dominated by other ETF issuers could trigger a shake-up in the ETF industry. Recent months have seen an increased focus on expense ratios, with several issuers cutting costs on popular products. The biggest escalation of the price wars in the ETF industry came earlier this month, when Charles Schwab slashed expenses on six of its eight equity ETFs [see Schwab Declares Price War]. Schwab’s U.S. Broad Market ETF (SCHB), which charges 0.06%, is now the cheapest U.S.-listed ETF, a title previously held by Vanguard’s VTI [see a list of the cheapest ETFs].

This latest development appears to challenge the dominant position established by iShares, which currently accounts for about 50% of all ETF assets and offers funds that will compete directly with the new Vanguard products. As Vanguard rolls out its new low cost ETFs, it will be interesting to see how the rest of the industry reacts. If investors vote with their feet and move towards the cheapest exposure available, it could cause other firms to reevaluate their expense ratios, and could lead to price cuts across the industry.

Stay tuned–there will no doubt be a number of interesting developments ahead as this story unfolds [for updates on the ETF industry, sign up for our free ETF newsletter].

Disclosure: No positions at time of writing.