(Bloomberg) — Every year over the past two decades, in good times and bad, there has been a sure-fire trend in Wall Street money management: The Vanguard ETF tightens its grip on the market.
But now the John Bogle-founded giant is tackling the $6.8 trillion industry harder than ever, intensifying a fee war in a line-up of money that has most of the billions already flowing into the market.
Late last month, almost unnoticed, Vanguard said it slashed fees on another 10 exchange-traded funds. It is in a suite of 82 US-listed ETFs that have already absorbed about $58 billion this year — all but 2,817 competing funds combined.
Those flows are set to surpass Larry Fink’s BlackRock Inc as the largest ETF manager within the next two years, coming on top of the firm’s record-breaking $328 billion in 2021, according to Bloomberg Intelligence. for one disturbed the world order. Held since 2003.
In the process the Pennsylvania-based firm is accelerating the acquisition of Malvern stock index funds – a development Bogle himself warned of hidden dangers – while offering smaller issuers more specialized and riskier strategies to survive. inspired to.
Vanguard “can stand a loss-leader because they have scale elsewhere,” said Jillian Delsignor, managing director and head of ETFs at FLX Distribution, a fintech platform for the asset-management industry. “If you shop one or two or 10 ETFs and you’re new, you can’t do that. You can’t have margins that look like this.”
Of the record $900 billion that was poured into the U.S. ETF industry in 2021, roughly one in three dollars went into Vanguard’s mostly inactive, dirt-cheap products. So far this year it is a multiple of two. In January, as rate fears sparked an equity sell-off, the firm lured $22 billion — dragging the entire ETF industry into a net inflow of $17 billion.
Perhaps because it’s not the largest issuer yet, or because it’s a champion of bringing low-cost investing to the masses, Vanguard’s massive growth has received limited criticism. But regulators began to fret over the size of firms like Vanguard and BlackRock — which combined manage more than $17 trillion — long before accelerating in the latest development. Writing in 2018 shortly before his death, Bogle also warned that focused index-fund ownership of Corporate America may not be in the national interest.
The booming ETF market is feeding into this process, with Vanguard increasingly leading the way. The firm’s stake in US ETF assets rose to 29.3% last year, marking its 20th straight year of growth. Current BlackRock’s slice of the pie in the industry fell to 34.6% — its third consecutive year of losing ground.
“Our intention is to reduce fees across the board — as we have in the past,” Rich Powers, Vanguard’s head of ETFs and index product management, said in an interview. “How does that manifest in individual products? If you look at our history, we’ve been very consistent in doing this across our ETF lineup.”
The average cost in Vanguard’s 82-fund lineup — which extends to both actively and passively managed funds in stocks and fixed income — is only 9 basis points, which means an investor can invest $10,000 for a year. Will pay for only $9. Its largest product, the $278 billion Vanguard Total Stock Market ETF (ticker VTI), takes up just 3 basis points. This compares to an average of 53 basis points for all US ETFs.
For Vanguard’s rivals, there’s a silver lining. The firm accounts for about 30% of the market by assets and claimed a third of ETF inflows last year. But it took in just 5% of revenue, according to Bloomberg Intelligence calculations. This suggests that at least some of the competitors are generating massive revenue in comparison to their market share.
The ongoing Vanguard-driven fee war is reducing the full amount that issuers can charge for each fund, however, which could reduce profitability. Meanwhile, the constant flow of large, installed and dirt-cheap idle vehicles makes entering the market a daunting task. Nearly a quarter of all US products launched in the past two years, but they account for only 2.5% of assets.
To survive, new and smaller issuers are launching proactive strategies, often pursuing riskier markets beloved by the day-trading army, including bitcoin and speculative technologies. Last year, for the first time, active ETFs launched outnumbered passives, and the trend continued — only nine of the 29 ETFs that began trading in January had inactive products.
In a world where Vanguard and BlackRock firmly control the bulk of the cash coming in for passive products, DelSignor expects indie issuers to dive ever deeper into the world of thematic and active funds.
“The idle ship has largely sailed,” she said.
Key to Vanguard’s Flow success is a unique ownership structure that allows index-fund champions to charge rock-bottom fees. Its ETFs are a share class of its mutual funds, where fund investors elect board members, who in turn are charged with making decisions about the company’s products.
In a typical corporate ownership structure, any excess cash or assets generated by a firm may be returned to shareholders through dividend payments or the like. But for Vanguard, according to Bloomberg Intelligence’s Eric Balchunas, that money is generally funneled to reduce fees, because there isn’t an “inherent tension between owners and investors.”
“The people who own the company are ultimately the investors of the fund, and they aim to have more money,” said Balchunas, senior analyst at the ETF. “No one copied this structure because there is no incentive, but the rest of the industry has to follow it.”
This includes not only new issuers, but also large, established players. In December, Vanguard reduced fees in 17 products, including about a dozen ETFs, many of which were in fixed income. This countered a move by rival State Street Global Advisors, which went down another rung in February. Charles Schwab and BlackRock followed suit with similar cuts.
The composition of ETF assets explains why. About 60% of the $6.8 trillion invested in U.S. ETFs is held in funds that charge 10 basis points or less, Bloomberg Intelligence data shows.
Vanguard’s powers emphasize the idea that the firm is outclassing competitors, highlighting that its ETFs represent a small fraction of the total.
“It just so happens that we have great products that are core products across multiple portfolios,” he said. “There are countless new issuers in the market. There’s a lot of room for others to bring high-quality, viable products.”