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Here's How Vanguard Can Be First in ETFs

It's worth noting that other ETF providers such as Charles Schwab (SCHW) and Fidelity have also been willing to lower their expense ratios to levels that meet or even fall lower than Vanguard. In addition, they waive ETF trading fees for clients on their platform. This is clearly an attempt to replicate the success of the low-cost Vanguard model.

While Vanguard is most likely thrilled to be closing in on second place in total ETF assets, I find it hard to believe the company will be satisfied until it is a true contender with BlackRock's iShares ETFs. In order to become number one, Vanguard ETFs need to focus on broadening the scope of its business to include additional sector and core strategies.

One of Vanguard's strengths is the patented method of opening an ETF as a new share class of an established mutual fund. This allows them to use the existing track record of the mutual fund to attract new assets and replicate the same underlying holdings.

They should consider opening up an ETF share class for the very popular Vanguard Wellington Fund (VWELX) and Vanguard Wellesley Income Fund (VWINX). Combined these two balanced mutual funds have nearly $120 billion in total assets and are extremely popular for conservative investors.

Other ETF strategies that Vanguard should consider pursuing include: precious metals and mining stocks, low volatility indexes, international dividend stocks, multi-asset funds, preferred stocks, and creative bond strategies. Many of these areas have been proven to be quite successful for other ETF providers and tend to have higher than average management fees. That is a perfect opportunity for Vanguard to exploit with a lower cost and perhaps unique alternative.

I have no doubt that Vanguard's success will continue indefinitely based on its current lineup, but it will need to further its product lineup to compete with BlackRock and take over the top spot. I look forward to watching all the companies' products and the ETF industry evolve over the next several years as the competition heats up.

At the time of publication the author had a position in VNQ.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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