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Vanguard fires another shot in ETF fee war

To launch short-term TIPS fund later this year at half the cost of iShares

By Jason Kephart

Jul 24, 2012 @ 12:55 pm (Updated 1:08 pm) EST

Vanguard TIPS ETF BlackRock iShares

Vanguard Group Inc. will be the first to tell you that it isn't in the midst of an ETF fee war, but to its competitors it sure must feel that way.

Vanguard filed with the Securities and Exchange Commission on Tuesday to offer a short-term Treasury inflation-protected securities exchange-traded fund. It will track the Barclays U.S. Treasury Inflation-Protected Securities 0-5 Years Index, which also happens to be the underlying index for the $358 million iShares Barclays 0-5 Year TIPS Bond ETF (ticker: STIP).

To the surprise of no one, the Vanguard version will carry a much lower expense ratio of 0.10%; the iShares ETF has an expense ratio of 0.20%.

Vanguard's low-cost approach to investing has been a home run with investors since the financial crisis. Over the past five years, Vanguard's assets have grown 40% to almost $1.7 trillion, as of June 30. Meanwhile, overall industry assets have grown just 10% over the same time period.

The dominance of Vanguard has been particularly vexing to BlackRock's iShares, which has been losing market share for more than two years to Vanguard's ETFs. Since 2010, Vanguard's ETFs have had inflows of nearly $100 billion, while iShares, the largest ETF provider with $482 billion in assets, has taken in $56.7 billion.

On BlackRock's second-quarter conference call this month, chief executive Laurence D. Fink acknowledged the struggles iShares is having in core U.S. equity products, which Vanguard considers its sweet spot,.

“Without going into much detail, we believe we have a plan to address it over the coming months. And it is a big issue, and I have to give a lot of credit to Vanguard, they are a trustworthy brand and they have taken market share from BlackRock in the U.S. core type of equity products,” Mr. Fink said.

A Vanguard spokesman declined to comment.

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