Financial advisers are keeping a close eye on
The Vanguard Group Inc.'s new Standard & Poor's 500 ETF to see how the exchange-traded fund performs and whether it can compete with State Street Global Advisors Inc.'s SPDR S&P 500 ETF (SPY).
The S&P 500 ETF (VOO), a share class of the firm's $86.8 billion Vanguard 500 Index Fund (VFINX), was one of nine funds introduced last week — all of which are based on S&P indexes and are categorized as share classes of existing Vanguard mutual funds. The total expenses for the S&P 500 ETF are 0.06% — the lowest in the industry and lower than its main competitor, the $69.9 billion SPDR S&P 500 ETF.
Traditionally, first movers in the ETF industry have had an advantage because they can achieve scale and thus liquidity, but observers think that Vanguard — with a strong brand and low costs — has a good chance of competing with State Street.
“I don't think anyone else could bring out an S&P 500 ETF and have any success with it,” said Paul Justice, an ETF analyst at Morningstar Inc. “If anyone has a shot, it's Vanguard.”
Advisers, who often wait at least 12 months to monitor how an ETF performs before buying in, said that they won't wait that long in this case.
“Vanguard has shown its ability to provide low-cost products that don't deviate from the index,” said Rich Romey, president and founder of ETF Portfolio Partners Inc., an advisory firm with $65 million in assets. “I doubt we'll have to wait two years to use it.”
Vanguard, which entered the ETF market nine years ago, has seen its assets boom. As of Aug. 31, the firm's ETFs had attracted $23.3 billion, which represents the lion's share of the $39.4 billion that all U.S. ETFs took in during the same period, according to Morningstar.
The firm doesn't think that being an underdog means that it can't attract substantial interest from investors and asset managers.
“Where we have gone head-to-head, with exactly the same benchmarks, we have captured a proportionate share of flows in those categories,” said Martha Papariello, a principal and head of financial adviser services at Vanguard.
Still, Vanguard has its work cut out for it going up against the SPDR S&P 500 ETF.
“Currently, SPY is the most actively traded security in the world,” said David Nadig, director of research at Index Publications LLC. “Volume begets volume, and there is nothing Vanguard can do to force traders to focus on their fund over SPY.”
However, Vanguard's low costs will be attractive to long-term investors, Mr. Nadig said.
Tom Lydon, president of Global Trends Investments, said that though he would consider putting new assets into the Vanguard fund if it proved to have a low tracking error, he doubts that he would switch clients out of the SSgA offering into the Vanguard fund, given that it costs only slightly less.
“It's not worth trading a current client out to save 3 basis points,” he said.
And it remains to be seen whether State Street will decide to lower its expenses to undercut Vanguard, Mr. Lydon said.
“Anything can happen,” he said.
Jim Ross, a senior managing director at State Street, didn't return a call seeking comment.
It is possible that The
Charles Schwab Corp., which recently dropped the expenses on a number of its ETFs, could lower the fees on its U.S. Large Cap ETF (SCHX), Mr. Nadig said.
“When they came out with their fund, they came out at 1 basis point lower than SPY,” he said. “They want to maintain the marketing edge to be the least expensive.”
Schwab spokesman Greg Gable didn't return a call seeking comment.
E-mail Jessica Toonkel at [email protected].
