Upset alert! Vanguard's ETF crown in trouble

BlackRock's iShare could beat longtime champ after index shift

Dec 21, 2012 @ 1:46 pm

By Jason Kephart

The Vanguard Group Inc.'s three-year run as the top exchange-traded-fund asset gatherer could be coming to an end.

BlackRock Inc.'s iShares, the largest ETF provider with $539 billion, has $47.2 billion of inflows through the first 11 months of the year, narrowly edging out Vanguard's $46.8 billion over the same time period, according to Morningstar Inc.

While it's a slim lead, there's been a clear shift in investor momentum since Vanguard announced it was changing the underlying indexes of 22 of its U.S. and international stock ETFs.

Vanguard announced the index changes on Oct. 2, and since then, its $5 billion of inflows have been dwarfed by $7 billion for iShares.

Not surprisingly, the shift has been most dramatic between the two ETF giants' emerging-markets ETFs. Since Vanguard announced it would drop MSCI as the underlying index of its $59 billion Vanguard MSCI Emerging Markets ETF ticker:(VWO), the fund has suffered almost $1 billion of net outflows. Over the same time, the iShares MSCI Emerging Markets ETF ticker:(EEM), which is now the only way to access the MSCI Emerging Markets Index through an ETF, has enjoyed $7 billion of net inflows.

It's been a stark reversal from inflows over the past three years. The Vanguard MSCI Emerging Markets ETF had $39 billion of inflows over the three-year period through June 30, compared with $1.3 billion in net outflows for the iShares ETF. Industry observers point to Vanguard's lower expense ratio as the main reason for its fund flow outperformance.

Fee cuts also have benefited iShares. In October it announced a new lineup of “core” ETFs that would have among the lowest expense ratios in the industry, although not quite as low as Vanguard's. In the first month of the fee cuts, the $34 billion iShares Core S&P 500 ETF ticker:(IVV) led all ETFs with $2 billion of inflows. Its expense ratio was reduced to 7 basis points from 9.

But don't feel too bad for Vanguard. With $130 billion of inflows from ETFs and mutual and money market funds through Nov. 30, the company is on pace to record the highest yearly total ever for a fund company. J.P. Morgan Funds set the record in 2008 with $129 billion of inflows, according to Strategic Insight.


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