Vanguard's funds reach new heights

Vanguard Group surpassed State Street Global Advisors as the second-largest ETF provider, a new milestone following a year that was filled with them

Jan 26, 2015 @ 7:09 am

By James Comtois and Richard Baert

+ Zoom
(Bloomberg News)

Vanguard Group Inc. last week surpassed State Street Global Advisors as the second-largest exchange-traded fund provider, a new milestone following a year that was filled with them.

According to, a data and analytic website, Vanguard had $432.65 billion in ETF assets at the close of business last Tuesday, giving it a 21.8% market share. SSgA had $431.8 billion, for a 21.7% share.

BlackRock Inc., New York, still dominates the market with $756.42 billion, or a 38.1% share.

Overall, Vanguard's global assets under management hit $3.1 trillion as of Dec. 31, according to data from the money manager. That includes $214.5 billion in net inflows for 2014 — a record for the money management industry and an increase of 56% for Vanguard from 2013.

(More: Dimensional Fund Advisors picks advisers, not stocks, and it works)

“Vanguard is doing ridiculously well, and why not? They offer competitively low prices, and as they've become bigger, they've lowered prices,” said Michael S. Falk, a consultant to money managers and a partner with Focus Consulting Group in Chicago.

The vast majority of those assets — $200 billion — went into index funds, which is, of course, what Vanguard, based in Malvern, Pa., is known for around the world.

Vanguard had $2.15 trillion in worldwide indexed assets as of Dec. 31. BlackRock reported $2.84 trillion, and SSgA, $1.946 billion.

Several factors — such as some popular active stock managers underperforming, increased fee sensitivity among asset owners and the current low-return environment — have accelerated institutional investors' growing appetite for passive strategies.


Christopher McIsaac, managing director and head of Vanguard's institutional investor group, said a lot of the firm's growth came from more institutional investors seeking passive investing.

“It was one of these years where a lot was going in our favor,” Mr. McIsaac added. “Investors are embracing the style of investing that Vanguard offers.”

Others agree. “The trend toward passive investing is something (Vanguard founder) John Bogle really believed in,” said Michael Rosen, a principal of Santa Monica, Calif.-based investment consultant Angeles Investment Advisors. “He didn't believe it would be a momentary academic study, but rather a positive long-term trend. And he's absolutely right.”

Mr. Falk said of Vanguard: “They have scale, pricing power and presence. It also doesn't hurt that they have had John Bogle fighting a great fight for years. What the man means to the industry is invaluable.”

Tim Barron, chief investment officer at investment consultant Segal Rogerscasey in Darien, Conn., added, “The shift from DB to DC has the potential to be another tailwind for Vanguard and passive management.”

Industry observers noted much of Vanguard's recent growth has been due in large part to fees in an industry where Vanguard is known as the low-cost provider.

(More: Vanguard to offer its first muni-bond ETF)

“When you come right down to it, they offer low-cost products,” said Daniel P. Wiener, editor of the Newton, Mass.-based newsletter Independent Adviser for Vanguard Investors. “Indexing has become much more popular, so that is accruing to their benefit.”

Although Mr. Rosen said he still believes in active management — “it just requires the right mix of resources, experience, organization and judgment to identify superior managers” — he noted “widespread underperformance in active management has led some clients to seek more passive management and ask whether it's worth paying the fees to outperform when a large percentage of managers don't.”

This trend, Mr. Rosen pointed out, has benefited Vanguard.


On the ETF side of the business, said Vanguard's move ahead of SSgA had more to do with recent outflows from SSgA's flagship SPDR S&P 500 ETF than any sudden gain in Vanguard assets, although Vanguard had been closing in on Boston-based SSgA in recent months.

In 2014, BlackRock and SSgA saw assets increase but market share decline, while Vanguard gained both in assets and market share, according to data from ETFGI, a London-based ETF research and consulting firm. As of Dec. 31, BlackRock had a 37.2% market share, down 1.2 percentage points despite the increase in inflows; and SSgA, at 17.3%, was down 0.1 percentage point. Vanguard, meanwhile, at 16%, enjoyed a 1.9-percentage-point boost.

Vanguard had been “on the cusp” of having a higher market share than State Street, said Michael Rawson, fund analyst at Morningstar. He expected Vanguard to surpass SSgA in market share sometime in 2015, but “I'm not surprised that it happened so quickly. I knew they were close. Vanguard's growth has been very steady, while State Street's flows can be a lot more volatile.”

Vanguard had global net inflows of $88 billion in 2014, up 46% from 2013, according to data from BlackRock's ETP Landscape report, issued in December.

(More: ETF managers bringing in historic levels of cash)

However, BlackRock and SSgA also had substantial inflows in 2014. BlackRock's iShares unit had a 61% increase in net global flows into its exchange-traded funds last year, to $102.4 billion as of Dec. 31, while helping raise total iShares assets under management to $1.034 trillion, up 12.3% from the previous year. SSgA's SPDR unit had net global inflows of $41.2 billion last year, a 142% rise.

Inflows at both BlackRock and SSgA rebounded from 2013; that year, iShares' inflows of $63.6 billion were down 26% from the previous year, while at SSgA, inflows of $17.2 billion were down 66% from a year earlier.

Vanguard, meanwhile, had inflows of $60 billion in 2013, up 10.7% from the previous year.


Sources said a push by BlackRock and SSgA into the retail ETF market from their traditional focus on institutional helped inflows rebound last year, while Vanguard continued to gain in its direct-to-retail business, already strong in mutual funds.

Lucas Montgomery, New York-based equity analyst at Sanford C. Bernstein & Co. Inc., said “it's tough to dismantle the affinity for Vanguard. Vanguard is the epitome of the value proposition in direct to retail,” he said. “Vanguard is hard to fight against.”

Efforts by BlackRock and SSgA to compete with Vanguard for retail clients have not borne fruit, said Morningstar's Mr. Rawson. He said BlackRock's Core suite of low-cost ETFs was “sort of a halfhearted attempt to compete with Vanguard. iShares never embraced low-cost ETFs the same as Vanguard did.”

Despite Vanguard's gains, “we feel very good about our market share, both in equity and fixed income,” said Ravi Goutam, managing director at BlackRock, San Francisco, “and we expect to see a very strong year in 2015.” Core ETFs “have had an incredible good year in terms of flows,” Mr. Goutam said, with $30 billion in inflows last year helping bring iShares' Core AUM total to $197 billion as of Dec. 31.

The reduction in BlackRock's market share shouldn't overshadow the fact the firm is still getting 50% of total global inflows, said Mr. Montgomery, who analyzes BlackRock and SSgA. “The fact that Vanguard is punching above its weight isn't necessarily because they've become a far better competitor.”

“It's really an issue of market segmentation. BlackRock, and State Street for that matter, focus on their institutional business, while Vanguard has what I would call an almost captive audience with a very loyal following in the direct retail channel.”

David Mazza, vice president, head of research at SSgA, Boston, disagreed with the assessment that the company is institutionally focused. “It's faulty to assume that the retail market is not one in which we want to expand,” he said. He cited efforts to widen its reach through intermediate marketplace wirehouses and independent registered investment advisers, notably through SSgA's inclusion of SPDR ETFs in Charles Schwab Corp.'s OneSource, a commission-free ETF platform that targets independent financial advisers and individual retail investors.

“We're focused on our own efforts and continue to look, not just to defend our market share, but to broaden it and expand all our product offerings to all markets,” Mr. Mazza said.

James Comtois and Richard Baert are reporters at sister publication Pensions & Investments


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


3 tips when hiring millennials

Advisers want to add young talent, but ask if they want to add millennials and most will begin to squirm. Hunter Hart, and Marc Schliefer of Equity Planning Inc. disspell some myths and misconceptions of hiring millennials.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.

E*Trade acquiring custodian Trust Company of America

Discount broker buying second-tier custodian for $275 million.

Another thousand Dow points higher, and investors yawn

Market milestones keep falling like dominoes, with 51 records broken so far this year.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print