Vanguard is set to launch seven new bond ETFs in what is an illustrative example of how the ETF industry is growing. The latest editions to the rapidly growing fixed-income ETF family are expected to include three U.S. Treasuries funds, three corporate bonds and one mortgage-backed securities fund. The new Vanguard funds are a shot across the bow for iShares, the ETF giant that currently dominates the fixed-income ETF product line. Currently, iShares offers 27 bond-based ETFs with assets of more than $63 billion, according to Morningstar. Vanguard has a smaller shop with five fixed-income funds whose assets total $8 billion. Vanguard is vying for a popular piece of iShares' business. The top two asset gatherers for iShares in 2009 have been fixed income products: iShares Barclays TIPS Bond ( TIP) and iShares iBoxx $ Investment Grade Corporate Bond Fund ( LQD). (See Fixed-Income ETFs Attracting Investors. Vanguard's strategy revolves around fees. The new ETFs are slated to have an expense ratio of 0.15%. This is the same pricing that iShares uses for its U.S. Treasury ETFs like the Barclays 1-3 Year Treasury Bond Fund ( SHY). The twist is when it comes to the new Vanguard corporate bond and mortgage-backed ETFs, which at 0.15% will be priced lower than comparable iShares ETFs. iShares' Barclays MBS Bond Fund ( MBB), for example, has an expense ratio of 0.25%. Vanguard isn't the first ETF issuer to realize how popular iShares' fixed income funds have become. Bond giant Pimco recently entered the arena, offering a 1-3 Year U.S. Treasury Index Fund ( TUZ) that currently has the winning price point of 0.09%. Pimco, already a fixed-income giant, is well positioned to release more funds that will go toe to toe with iShares ( Pimco Breaks Ground on Active ETFs).
Schwab ( SCHW) is also well positioned to be a contender in an arena where cost is king. Earlier this year, Schwab announced its intention to launch its own line of proprietary funds. ( Schwab Jumps Into ETF Race) Schwab has shown no fear when it comes to offering cheaper alternatives: in May, Schwab cut the expense ratio of its Schwab S&P 500 Index ( SWPIX) to 0.09%, a fee that is less than the Vanguard 500 Index ( FVINX) fund. We are entering an age of mega ETF issuers. Small ETF issuers have always dotted the landscape, grabbing for volume in previously untested territory. The booming popularity of ETFs, however, has large asset managers thinking bigger. BlackRock ( BLK) acquired iShares recently, while Schwab and Pimco already offer a variety of securities. New ETF strategies appear to be aimed at the longer-term investor who is looking for an alternative to mutual funds. This approach will be a double-edged sword for issuers. On the one hand, the low-cost structure of ETFs could draw more long-term investors into these products. On the other hand, long-term investors won't be trading in and out of these strategies, potentially depriving the funds of trading volume. Low-volume ETFs have withered and died on the vine in the past. The advantage to being a Mega ETF Issuer like Vanguard is that you can afford to cultivate these products until they draw investors. ( ETF Investors: Look for Liquidity.)