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ETFs and the ‘Vanguard Effect’


Vanguard is neck-and-neck with BlackRock’s (BLK) iShares for the best-selling ETF family in 2012 as the fund company enjoys its best year ever.

“The $130.4 billion in deposits in mutual funds and exchange-traded funds that Vanguard has taken in through November is the most ever for the industry,” Bloomberg News reports.

Vanguard is the third-largest ETF provider with $236 billion through the end of November, or about 18% market share, according to Morningstar, while iShares controls $539 billion and State Street (STT) manages $318 billion.

Year to date, Vanguard has attracted ETF inflows of $46.9 billion and iShares has brought in $47.2 billion.

“Now the market is watching—with equal parts gratitude and trepidation—the rapid escalation of the ‘Vanguard effect.’ It’s asymmetric warfare, as Vanguard’s sole ownership and constituency is its fundholders, the savings it wrings from its buying power are passed on to them, not to shareholders or partners,” Bloomberg reports.

In the U.S. marketplace, there are 1,442 exchange traded products from 50 fund managers, according to XTF. It is a $1.3 trillion industry. ETF assets have risen by $265.9 billion this year, or 25%, while net inflows have totaled $163.2 billion.

Vanguard’s largest ETFs are the $58.5 billion Vanguard MSCI Emerging Markets (VWO) and the $23.6 billion Vanguard Total Stock Market (VTI).

“No one should be shocked,” said Josh Brown at The Reformed Broker blog, in the Bloomberg story. Brown said that Vanguard is selling the lowest-cost bond funds in a climate in which every basis point counts, as well as “the plainest-vanilla indexes” in a market whose most expensive stock-pickers, he says, have been “rendered impotent.”

Since the market bottomed in March 2009, equity mutual funds have experienced a cumulative net outflow of $242 billion, compared with a net inflow of $270 billion to equity ETFs, according to the article.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.