Vanguard Rolls Out Exchange-Traded Fund Pegged to Wilshire 5000

Index-fund titan Vanguard finally stepped into the burgeoning exchange-traded fund world Thursday when its Vanguard Total Stock Market VIPERs began trading on the American Stock Exchange.

Stymied in its efforts to launch exchange-traded shares tracking the S&P 500 , Vanguard launched shares tracking the even broader Wilshire 5000 Total Market index on Thursday, trading under the symbol VTI. The new share class will carry a 0.15% expense ratio, or $15 a year on a $10,000 investment. That's slightly lower than the 0.2% annual fee on the fund's traditional fund shares, and both are well below an average large-cap blend fund's 1.24% annual expense ratio, according to Morningstar.

The new share class will give Vanguard a fund in the broad index-based exchange-traded fund market, as a licensing beef with Standard & Poor's has derailed the firm's efforts to launch exchange-traded shares for the (VFINX)Vanguard 500 Index fund.

Unlike traditional mutual funds, exchange-traded funds, or ETFs, price throughout the trading day and trade like stocks on an exchange. Their popularity is a potent threat to traditional index mutual funds, where almost half of the $206 billion invested in S&P 500 index funds sits in Vanguard's coffers, according to Lipper. Of the $66 billion invested in ETFs, nearly $59 billion is invested in funds tracking broad U.S. stock indices like the S&P 500, according to the Investment Company Institute, the fund industry's largest trade group. For more details on ETFs, check out this primer.

Vanguard's new ETF share class, called VIPERs (short for Vanguard Index Participation Equity Receipts), is the firm's first foray into the ETF market. The fund's 0.15% expense ratio is lower than the actual expenses carried by other broad, index-based ETFs, and it will be the first to track the Wilshire 5000, an index designed to mirror the performance of all U.S. traded stocks. That said, investors have to use brokers and pay a commission when they purchase ETF shares.

While the fund's low costs match Vanguard's cheap, long-term image, ETFs fast-trading image doesn't. Vanguard founder and industry legend John Bogle has criticized ETFs for potentially luring investors into short-term trading.

"I think [ETFs are] a natural step for Vanguard, but it's interesting that Bogle had been critical of ETFs because most of the money going into ETFs is going in and out very fast," says Russ Kinnel, director of fund research at Chicago fund-tracker Morningstar. "I think ETFs are mainly tools for institutions or short-term traders. To a degree, they haven't lived up to their billing, but people still might use them correctly."

Shareholders of the (VTSMX)Vanguard Total Stock Market Index fund's traditional share classes will be able to convert to the fund's ETF shares for a $50 fee once the shares launch at the end of May, according to a company statement.

The Vanguard Total Stock Market Index fund's traditional shares average a 13.1% annualized gain over the past five years, keeping pace with the average big-cap blend fund and lagging the S&P 500 by 1.8 percentage points, according to Morningstar.

The VIPERs shares opened trading at $114.50 and rose to $115.41, with two hours left in the trading day, on volume of 1.7 million shares, according to Morningstar.

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