NEW YORK (Fabian Capital Management) -- Investors are continuing to shift their assets from stodgy mutual funds to exchange-traded funds at a tremendous clip. Total U.S.-listed ETF assets recently reached a new all-time high of $1.762 trillion and some experts predict they will hit $3 trillion within the next several years.
Investors are choosing ETFs for a number of reasons including their low-cost, liquidity, diversification, transparency and tax efficiency. However, one element more than others appears to be driving the majority of asset flows in this mature phase of the product cycle -- that element is cost.
In the first four months of 2014, Vanguard led all ETF providers with $18.6 billion in new asset inflows and is close to surpassing State Street (STT) as the number two ETF issuer by total assets. Currently Vanguard is in third place with $360 billion in ETF assets, while State Street ranks second with $386 billion.
BlackRock (BLK) is the reigning king with $683 billion in ETF assets, which they will have to tightly defend in order to stay ahead of the Vanguard powerhouse.The biggest strength of the Vanguard brand (both in ETFs and mutual funds) has been the passive index approach combined with rock-bottom fees. This has lured investors away from actively managed mutual funds that employ stock picking strategies to try and beat the market. Many studies have shown that the majority of these active strategies charge higher fees and post meager returns when compared to a benchmark index. Thus, the "bread and butter" of the Vanguard ETF strategy is to provide cheap access to established indexes with excellent liquidity. Clearly the plan is working well, as five of the top seven ETFs for new asset flows in 2014 have been Vanguard ETFs. This includes core strategies such as the Vanguard S&P 500 ETF (VOO) and the Vanguard Total Stock Market (VTI). Both of these ETFs charge just 0.05% in annual expense ratio. That's the equivalent of $50 per year for a $100,000 total investment that gives you diversified access to hundreds of underlying stocks. You can't get much cheaper than that. When you dive into individual sectors, the differences in fees between comparable ETF offerings can be tremendous. Consider the Vanguard REIT ETF (VNQ) charges an expense ratio of 0.10%, while the iShares Real Estate ETF (IYR) is listed at 0.45%. That's nearly five times the annual fee for a similar basket of securities.