Inflows lead to price cuts of Vanguard ETFs

Most are international focused in automatic response to money flows

By Carl O'Donnell

Feb 27, 2014 @ 2:26 pm (Updated 7:01 pm) EST

etfs, exchange-traded funds, vanguard, fees, cuts, expenses, investors, inflows

Vanguard has cut the expense ratios on five ETFs, largely as an automatic response to increased asset inflows.

The exchange-traded funds are mostly international in focus and include the FTSE All-World ex-U.S. Small-Cap ETF (VSS), the FTSE Emerging Markets ETF (VWO), the Global ex-U.S. Real Estate ETF (VNQI), the Total International Stock ETF (VXUS) and the Total World Stock ETF (VT).

“Internationally focused products have seen some investor interest even as the U.S. has seen outflows in the last two months,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ.

(See how ETFs did in the fourth quarter of 2013.)

When these funds have inflows, Vanguard is able to spread out operational expenses across a larger asset base and pass on the savings to investors, said David Hoffman, a spokesman for The Vanguard Group Inc. The reverse can happen if assets decline.

“The bigger these funds get, the harder their expense ratios fall,” said Ben Johnson, director of passive-funds research at Morningstar Inc.

The asset base for almost every fund has increased. VSS grew to $1.7 billion, from more than $1 billion, between Oct. 31, 2012, and Oct. 31, 2013. VNQI grew to $1.3 billion, from roughly $380 million, during the same time frame. VXUS reached more than $2.1 billion, from about $966 million, and VT grew to $2.8 billion, from about $1.4 billion, according to Vanguard data.

Meanwhile, VWO actually shrank during that period to $51 billion, from $57 billion. However, the fund had been riding a wave of previous growth, so there were still sufficient cost savings to give investors a cut, Mr. Hoffman said. There's no direct correlation between asset inflows and cost cuts, he added.

The price cuts also maintain Vanguard's competitive edge in the market. For example, thanks to Thursday's reductions, VXUS now undercuts the iShares Core MSCI Total International Stock (IXUS) by 0.02%. The two ETFs differ slightly, however, with IXUS using an index from MSCI rather than FTSE.

“Vanguard has always offered among the lowest-cost products in any investor style,” Mr. Rosenbluth said. “Vanguard is the third-largest ETF provider but has been gradually increasing its market share. Part of this is because low costs matter to many investors.”