Vanguard Group Inc., the third-biggest provider of exchange-traded funds, gained ground on larger competitors this year after gathering more than seven times as much money into its ETFs than the rest of the U.S. industry combined.
Vanguard attracted $13.1 billion, or almost 90% of the money gathered by all U.S. ETFs in the quarter ended March 31, according to data compiled by Bloomberg. Clients pulled a net $18.3 billion from ETFs run by State Street Corp., including $19 billion from the SPDR S&P 500 ETF Trust, known as the Spider.
Vanguard, started almost four decades ago by John C. Bogle, has been able to attract steady deposits from savers by offering low-cost funds, a strategy that helped it become the largest mutual-fund provider. A latecomer to ETFs in part because Bogle was opposed to them, the firm has been narrowing the gap with industry leaders such as BlackRock Inc. and State Street, whose products are popular among fickle institutional investors such as hedge funds that seek ways to trade in and out of markets quickly.
"We think Vanguard's market share is going to grow and in the very near future can take over the Number 2 spot from State Street because they have a broad array of successful products," Todd Rosenbluth, director of mutual-fund and ETF research at S&P Capital IQ in New York, said in a telephone interview.
Individuals, or retail investors, are drawn to Vanguard funds for their lower fees, while institutional users gravitate to more actively traded products for their liquidity, which reduces trading costs, said Ben Johnson, director of passive funds research at Morningstar Inc.
Vanguard's Philosophy
Founded by Bogle in 1975, Vanguard became the first firm to make index funds available to retail investors. By spreading money across the entire stock market at low cost, Bogle argued that investors could beat the vast majority of stock-picking fund managers. Vanguard's philosophy has helped it attract assets and catapult it into the largest mutual-fund manager, running five of the 10 biggest U.S. mutual funds.
Vanguard started pushing into ETFs more than a decade ago as it sought to bring that same idea to the fastest-growing area of the asset management industry. Its ETFs are run as share classes of mutual funds, a structure Vanguard patented.
Assets at Vanguard's U.S. ETFs have surged at a faster rate than at BlackRock and State Street, advancing 68 percent over the past two years to $345 billion, according to data compiled by Bloomberg. BlackRock, the biggest provider of ETFs, increased U.S. assets by 35 percent to $675 billion and State Street, the second-largest, saw a 27 percent increase to $380 billion.
Expense Ratios
Vanguard is owned by its fund shareholders, making it essentially a non-profit company. Instead of distributing profits, it reduces fees charged to shareholders when revenue projections exceed those for expenses. Vanguard's ETFs carry an average annual expense ratio of 0.14 percent, less than half of the 0.40 percent charged by BlackRock and 0.36 percent for State Street, according to data compiled by Bloomberg.
The Vanguard FTSE Europe ETF gathered $2.1 billion in the first three months of the year, becoming the most popular fund in the quarter.
The $157 billion Spider, the largest ETF, was the biggest loser in the past three months, reversing its position as the best-selling ETF in the prior quarter. It attracted $21.1 billion the last three months of 2013, helping State Street lead all ETF providers in that period with $25.3 billion in net deposits.
