Vanguard Launches Bid to Lead Broad Market

Vanguard launched nine ETFs on Sept. 9 targeting the style-box matrix based on S&P indexes with growth, value and blend versions of the large-cap S&P 500, the S&P Mid-Cap 400 and the S&P Small-Cap 600. All will compete with existing SPDRs and iShares products based on the same indexes.

Some analysts may brush these off as "me too" products, but Vanguard knows how to play "me too" better than anyone. Most Vanguard products on the market fit this description, yet the company has quietly entrenched itself as the third-largest ETF provider, with more than $110 billion in assets.

Vanguard introduced its first two ETFs in 2001, then sat quietly until January 2004 when it introduced 14 more. Only a licensing disagreement kept the 2004 batch from tracking S&P indexes. So Vanguard brought them out based on MSCI indexes.

Now, 34 years after the introduction of the Vanguard 500 Index Fund ( VFINX), the ETF version has arrived. According to a Vanguard article, the new Vanguard S&P 500 ETF ( VOO) features an expense ratio of 0.06%, the lowest expense ratio in the industry for an ETF based on the S&P 500 Index or any other large-capitalization domestic benchmark. All nine of the new ETFs are eligible for commission-free trading by Vanguard brokerage clients. The new ETFs:

  • Vanguard S&P 500 ETF (VOO) has an expense ratio of 0.06% and will compete directly with SPDR S&P 500 (SPY) and iShares S&P 500 (IVV), which have a 0.09% expense ratio.
  • Vanguard S&P 500 Growth ETF (VOOG) has an expense ratio of 0.15% and will compete directly with iShares S&P 500 Growth (IVW), which has a 0.18% expense ratio.
  • Vanguard S&P 500 Value ETF (VOOV) has an expense ratio of 0.15% and will compete directly with iShares S&P 500 Value (IVE), which has a 0.18% expense ratio.
  • Vanguard S&P Mid-Cap 400 ETF (IVOO) has an expense ratio of 0.15% and will compete directly with SPDR S&P MidCap 400 (MDY), which has a 0.25% expense ratio, and iShares S&P MidCap 400 (IJH), which has a 0.20% expense ratio.
  • Vanguard S&P Mid-Cap 400 Growth ETF (IVOG) has an expense ratio of 0.20% and will compete directly with iShares S&P MidCap 400 Growth (IJK) which has a 0.25% expense ratio.
  • Vanguard S&P Mid-Cap 400 Value ETF (IVOG) has an expense ratio of 0.20% and will compete directly with iShares S&P MidCap 400 Value (IJJ), which has a 0.25% expense ratio.
  • Vanguard S&P Small-Cap 600 ETF (VIOO) has an expense ratio of 0.15% and will compete directly with iShares S&P SmallCap 600 (IJR), which has a 0.20% expense ratio.
  • Vanguard S&P Small-Cap 600 Growth ETF (VIOG) has an expense ratio of 0.20% and will compete directly with iShares S&P SmallCap 600 Growth (IJT), which has a 0.25% expense ratio.
  • Vanguard S&P Small-Cap 600 Value ETF (VIOV) has an expense ratio of 0.20% and will directly directly with iShares S&P SmallCap 600 Value (IJS), which has a 0.25% expense ratio.
  • Expense ratios are not the only factor when choosing between ETFs tracking identical indexes. Other consideration include commissions, dividend payment policies, liquidity and tracking error:

  • Commissions: The Vanguard ETFs are commission-free for clients of Vanguard, and the iShares ETFs listed above are commission-free for clients of Fidelity. Investors using other firms and anyone trading the SPDR ETFs will have to pay standard brokerage commissions.
  • Dividend payment policy: Vanguard and iShares typically follow the "industry best practice" of paying dividends within four business days of the ex-dividend date. SPDR has one of the most egregious dividend policies of any ETF sponsor by delaying dividend payments from SPDR S&P 500 (SPY) up to six weeks.
  • Liquidity: SPY wins the liquidity argument hands down, as it typically accounts for more than a third of all ETF dollar volume every month. The nine competitive products from iShares are in the top 20% of all ETFs for average dollar volume and assets under management. The new Vanguard products have some catching up to do in this regard, but based on the success of their other products, this should not be a significant disadvantage for too long.
  • Tracking Error: The S&P indexes are well understood, and all three firms have extensive experience managing products based on them. The new ETFs will likely own all stocks in the index being tracked and not rely on sampling techniques. Therefore, any tracking error is likely to be insignificant.
  • When I first saw the ticker symbols for the new Vanguard ETFs, I thought they were just a hodgepodge of letters with Vs and Gs stuck on the end to distinguish Value from Growth. Then someone pointed out that the letters on the front are derivatives of roman numerals: V for 5 and VOO for S&P 500, IV for 4 and IVOO for S&P 400, VI for 6 and VIOO for S&P 600. I have them memorized already.

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    Ron Rowland is long IJH but has no positions in the companies or ETF sponsors mentioned. No income, revenue or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned. Rowland is the founder and president of Capital Cities Asset Management, a fee-based registered investment adviser in Austin, Texas. He is also the founder and publisher of Invest With An Edge and All Star Investor, where he has been providing market commentary and active investment advice since 1991. Opinions expressed in this article should not be considered personal recommendations to buy or sell any security.

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