BOSTON —
Fidelity Investments and American Funds lagged behind
The Vanguard Group Inc. in stock and bond mutual fund sales for this year through May as investor appetite for low-cost index and exchange traded funds increased.
Vanguard’s long-term net inflows totaled $39.5 billion through May 31, up 84% from the first five months of 2006.
Meanwhile, net flows into long-term funds at Fidelity totaled about $4.9 billion during the first five months of the year, a decline of more than 68% from the corresponding period in 2006, according to Boston-based Financial Research Corp. American Funds attracted $38.8 billion, a 13.2% increase.
Malvern, Pa.-based Vanguard, as of April 30, ranked as the third-largest fund company behind Fidelity and American Funds as measured by total assets, according to the Investment Company Institute in Washington.
Investors’ greater attention to fees and taxes may be giving Vanguard an edge, some observers said.
“The public is becoming more and more aware of index funds and exchange traded funds, and seeing them as a way to reduce their costs for investing,” said Stephen Bingham, owner of Bingham Financial Advisory LLC of Arlington, Va. “I get more questions now than I used to get about fees.”
The average fees and expenses investors paid on mutual funds fell last year to their lowest levels in more than 25 years, according to a report from the ICI, the fund industry’s main trade association.
Gravitational pull
“Investors gravitate toward low-cost funds,” the report said, adding that last year investors held 90% of their stock fund assets in funds where expense ratios were less than average for stock funds.
Index funds and ETFs tend to cost less and be more tax efficient than actively managed funds.
The average expense ratio for a U.S. diversified-stock fund is 1.42%, according to Chicago-based Morningstar Inc.
The average for comparable index funds is 0.70%. Comparable ETFs come in at 0.34%.
Flows into index funds — including ETFs — accounted for 26% of long-term fund flows overall for the first five months of this year, up from 20% during the year-earlier period, according to FRC.
Vanguard had a 46% share of the index fund market, including ETFs, as of May 31, making it the biggest provider in the industry, according to FRC. Boston-based Fidelity ranked fourth.
Still, despite Vanguard’s reputation, it isn’t always the lowest-cost provider.
For instance, investor class shares of the Fidelity Spartan 500 Index Fund (FSMKX) have an expense ratio of 0.10%. That compares with 0.18% for investor shares of the Vanguard 500 Index Fund (VFINX).
Fidelity offers just one ETF.
A lack of fund marketing — not anything to do with expenses — is what has been depressing Fidelity’s sales, according to Jim Lowell, editor of Fidelity Investor, a monthly newsletter based in Needham, Mass.
“We have not seen a targeted sort of product campaign from Fidelity for many years,” Mr. Lowell said.
“What we’ve seen is a platform campaign — their advertisements for rollover [individual retirement accounts] on every major TV channel at least 20 times a day,” he said. “But when’s the last time you saw them marketing to the strength of their products?”
Fidelity’s index funds “are among the very lowest-cost” in the market, spokesman Vin Loporchio said.
“And our actively managed funds are highly competitive and among the lowest in the industry, as well,” he said, adding that when money market funds are included, Fidelity had net inflows of $23.3 billion this year through May.
No index funds or ETFs
A third of Fidelity’s equity assets are in funds closed to new investors, Mr. Loporchio said.
Los Angeles-based Capital Research and Management Co.’s American Funds group has no index funds and no ETFs.
“All of our funds are actively managed; however, we have a strong commitment to low operating expenses,” American Funds spokeswoman Maura Griffin said. “Our expenses are among the lowest in the mutual fund industry.”
Vanguard has $660 billion in passively managed assets — which includes index funds and ETFs — and $580 billion in actively managed assets, said spokesman John Woerth. The company launched five ETFs this year — four bond and one broad international offering — that he said have the lowest expense ratios of any of their peers.
Taxes likely were a big driver of flows to Vanguard this year, Mr. Bingham said. U.S. mutual fund investors in taxable accounts paid $23.8 billion in taxes for last year, the second-biggest such tax bill at least since 1990, according to Tom Roseen, a Denver-based senior research analyst for Lipper Inc. of New York.
That likely came as a jolt to investors whose tax bills had been buffered for years by losses the funds were able to carry forward from 2001 and 2002, Mr. Bingham said.
“With the exchange traded funds and the index funds, you are going to have less turnover, so you are going to have less taxes in general from those types of investments,” he said.
For the past three or four years, certified financial planner Joe Baker has used ETFs almost exclusively for the majority of the individual client accounts in his practice.
“One of the biggest things for Vanguard’s increase in assets is the ETFs,” said Mr. Baker, president of ALCUS Financial Group LLC in Mount Pleasant, S.C., adding that “people are paying more attention to fees right now.”
