The Vanguard Group Inc. last week filed a registration statement with the Securities and Exchange Commission to offer seven bond index exchange traded funds in what some industry experts think will be a direct challenge to iShares, the dominant fixed-income ETF provider.
Three of the ETFs are expected to invest in U.S. Treasuries, three in corporate bonds and one in mortgage-backed securities, according to the filing from Vanguard of Malvern, Pa.
The ETFs — planned as shares of proposed bond index funds — all come with expected expense ratios of 0.15%.
That is the same expense ratio that iShares, a unit of Barclays Global Investors of San Francisco, charges for its comparable U.S. Treasury ETFs, but lower than the 0.2% it charges for comparable ETFs that invest in corporate bonds and the 0.25% it charges for its comparable mortgaged-backed ETF.
It appears that Vanguard's goal is to wrest “control of the exchange traded bond fund market from Barclays' iShares group,” Daniel Wiener, the New York-based chairman and chief executive of Adviser Investment Management Inc., wrote in an e-mail. The Newton, Mass., firm manages more than $1 billion in assets.
Vanguard, however, has a long way to go before it can best iShares.
Vanguard offers five fixed-income ETFs with more than $8 billion in assets, while iShares offers 27 bond ETFs with total assets of more than $63 billion, according to Morningstar Inc. of Chicago.
But by pricing its bond ETFs lower than iShares — at least with regard to corporate and mortgage-backed funds — Vanguard is off to a good start, according to industry experts.
“I think cost is going to be at the top of investors' minds,” Mr. Wiener said.
Otherwise, there isn't anything unique about the proposed Vanguard ETFs.
The funds would be pegged to Barclays Capital indexes, formerly Lehman Capital indexes.
Barclays acquired the indexes, developed by Lehman Brothers Holdings Inc., following the New York investment bank's Sept. 15 filing for Chapter 11 bankruptcy protection.
Vanguard, however, thinks that its proposed ETFs would offer investors something different.
For example, comparable iShares ETFs track credit indexes rather than corporate indexes.
Credit indexes include exposure to bonds issued by “supranationals” — institutions established and controlled by their sovereign government — which tend to be AAA bonds with lower yields, said Rebecca Cohen, a spokeswoman at Vanguard.
For its part, Vanguard said that expanding its bond offerings makes sense given the firm's expertise.
“Vanguard has a quarter century of experience in bond index management, and expanding our range of funds is a logical extension of our capabilities,” Bill McNabb, president and chief executive of Vanguard, said in a statement.
“Financial advisers and institutions want to construct broadly diversified fixed-income portfolios, while retaining the ability to emphasize particular sectors or durations,” he said. “Working in concert, our broad-based bond index funds, and these new, more targeted funds can help to achieve this goal.”
But at least one financial adviser speculated that there might be another motive for Vanguard.
“ETFs are going to find their way to 401(k) plans perhaps more rapidly than we believe,” said William Koehler, chief investment officer of ETF Portfolio Solutions Inc., a Leawood, Kan., firm with $50 million under management.
Barclays launched a program in May to help advisers use ETFs as investment options within 401(k) retirement plans.
Vanguard may sense that it needs to increase the number of bond ETFs it offers if it wants to market its ETFs in the retirement space, Mr. Koehler said.
Expanding its bond ETF lineup has nothing to do with an attempt by Vanguard to get ETFs into retirement plans, Ms. Cohen said.
In some cases, it wouldn't be appropriate for retirement plans to use the ETFs, given that institutional shares of the proposed funds are cheaper, with an expense ratio of 0.09%, and are available to companies and organizations with account balances of $5 million or more, she said.
E-mail David Hoffman at [email protected].
