Every year over the past two decades, in the good times and the bad, there's been one surefire trend in Wall Street money management: Vanguard tightens its grip on the ETF market.
But now the John Bogle-founded giant is squeezing the $6.8 trillion industry harder than ever, by ramping up the fee war across a line-up of funds that is already raking in most of the billions flowing into the market.
Late last month, almost unnoticed, Vanguard said it had slashed charges on another 10 exchange-traded funds. That's in a suite of 82 U.S.-listed ETFs, which have already absorbed about $58 billion this year — more than all 2,817 competing funds combined.
Coming on top of the firm's record-shattering $328 billion haul in 2021, those flows put Vanguard on course to surpass Larry Fink's BlackRock Inc. as the largest ETF manager within the next two years, according to Bloomberg Intelligence — upsetting a world order that has held since 2003.
In the process the Malvern, Pennsylvania-based firm is accelerating the takeover of stock index funds — a development Bogle himself warned created hidden dangers — while driving smaller issuers to offer ever-more niche and risky strategies to survive.
Vanguard "could put up a loss-leader because they have scale in other places," said Jillian DelSignore, managing director and head of ETFs at FLX Distribution, a fintech platform for the asset-management industry. "If you are a one or two or even 10 ETF shop and you're new, you can't do that. You can't have margins that look like that."
Of the record $900 billion poured into the U.S. ETF industry in 2021, roughly one in every-three dollars went to Vanguard's mostly passive, dirt-cheap products. So far this year it's more than one in two. In January, as rate fears drove an equity selloff, the firm lured $22 billion — dragging the entire ETF industry to net inflows of $17 billion.
Perhaps because it's not yet the biggest issuer, or because it's a champion of bringing low-cost investing to the masses, Vanguard's rampant growth has received limited criticism.
But regulators began fretting the size of firms like Vanguard and BlackRock — which manage more than $17 trillion combined — long before the latest growth spurt. Writing in 2018 shortly before his death, Bogle also warned that concentrated index-fund ownership of corporate America may not be in the national interest.
The booming ETF market is feeding this process, with Vanguard increasingly leading the way. The firm's share of U.S. ETF assets grew to 29.3% last year, the 20th straight year of growth. Industry incumbent BlackRock's piece of the pie slipped to 34.6% — its third consecutive year of losing ground.
"Our intention is to reduce fees across the board — much like we have in the past," said Rich Powers, Vanguard's head of ETF and index product management, in an interview. "How does that manifest in individual products? If you look at our history, we've been very consistent in doing that across our ETF lineup."
The average cost across Vanguard's 82-fund lineup — which spans both actively and passively managed funds across stocks and fixed income — is only 9 basis points, meaning an investor would pay just $9 to invest $10,000 for a year.
Its biggest product, the $278 billion Vanguard Total Stock Market ETF (ticker VTI), charges just 3 basis points. That compares to an average 53 basis points for all U.S. ETFs.
Silver Lining
There's a silver lining, of sorts, for Vanguard's rivals. The firm accounts for almost 30% of the market by assets and claimed a third of ETF flows last year. But it took just 5% of revenue, according to Bloomberg Intelligence calculations.
That shows at least some competitors are generating outsize revenue compared to their market share.
The ongoing Vanguard-driven fee war is driving down the absolute amount issuers can charge for each fund, however, which could be reducing profitability.
Meanwhile, the relentless flow into big, established and dirt-cheap passive vehicles makes entering the market a challenging task. Around a quarter of all U.S. products launched in the past two years, but they command just 2.5% of assets.
