The Vanguard Group’s announcement this week that it is cutting the expense ratios on 53 of its 88 exchange-traded funds as part of sweeping fee cuts to mutual funds and ETFs, will apply more of that trademark Vanguard fee pressure on the rest of the asset management industry.
For financial advisors and their clients, this is good news.
But, beyond just inflicting another round of margin pressure on the broader asset management industry, the news also says something about the potential and direction of things happening inside the $9.1 trillion Malvern, Pennsylvania, fund complex.
According to Vanguard, the fee cuts on 168 mutual funds and ETFs will save investors more than $350 million this year.
While it’s nice to see the 50-year-old asset management innovator sticking to its formula and philosophy of returning money to investors, Vanguard is still a business that is run to be as competitive as possible.
On that note, we turn to exhibit A, in the form of a flood of money going into active ETFs, which make up the tiniest slice of Vanguard’s more than $2.6 trillion worth of ETF assets.
While active ETFs represent only about 8% of all ETF assets, they accounted for 25% of inflows last year.
That reality can’t be sitting well in the boardroom of a fund company like Vanguard, which has put most of its heft behind indexed ETFs.
“Right now, Vanguard has just six active ETFs and they are quite small, and given their current product set, eventually they may try and expand into active,” said Aniket Ullal, head of ETF research at CFRA, and a member of the etf.com advisory board.
More likely, and more immediately, Ullal speculated, is that Vanguard will turn up the heat in the indexed side of the ETF space.
Ullal separated the 53 Vanguard ETFs subjected to fee cuts into six broad categories to highlight the current low-cost providers and net asset leaders among ETF issuers.
Vanguard is already the low-cost leader in ex-U.S. regional ETFs, U.S. core Russell index-linked ETFs, dividend and growth/value ETFs, and Vanguard shares the low-cost spot for fixed-income ETFs with Charles Schwab Corp. (SCHW) nd BlackRock Inc. (BLK).
In terms of asset leaders, Vanguard holds the ex-U.S. regional slot alone and shares with BlackRock the fixed-income and dividend and growth/value categories.
“Within the index space, there is probably more opportunities for Vanguard where they are not the biggest player,” Ullal said. “They need to look at pockets where there is still room to take market share from providers.”
And the category that stands out in the CFRA research is sector ETFs, where Fidelity Investments holds the title of low-cost leader and State Street Global Advisors holds the net asset crown.
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Of the 53 ETFs that saw expense ratios cut, 10 are in the sector category.
“State Street has always dominated the sector category,” said Ullal. “And sector ETFs is one of those large and popular spaces where Vanguard is not the biggest player.”
