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Passive Funds Drive Vanguard’s Ascent


Index funds have helped Vanguard become a $3 trillion asset manager for the first time, but some investors may be surprised to learn exactly which kind of index funds are accounting for a significant portion of the firm’s growth.

Pennsylvania-based Vanguard is within striking distance of taking over the number two spot among U.S. providers of exchange traded funds and the company has been the most impressive asset gatherer among ETF providers this year, though it ceded that title to iShares in the second quarter. [iShares Leads Q2 ETF Flows]

However, passively managed index mutual funds have led Vanguard’s asset growth this year, not ETFs.

“The index fund vs. ETF trend continued this year, with investors pouring $65.7 billion into Vanguard’s index mutual funds, compared with $37.1 billion into index ETFs in the seven months through July,” reports Kirsten Grind for the Wall Street Journal, citing Morningstar data.

That extends last year’s trend when investors poured $99.8 billion into Vanguard’s index-based mutual funds compared to $55 billion into comparable ETFs with $24 billion of outflows from actively managed mutual funds, according to the Journal.

Vanguard currently does not offer actively managed ETFs.

Part of the reason why Vanguard’s index mutual funds are outpacing its ETFs in terms of inflows could be explained by the 401(k) market. Vanguard is among the most dominant fund providers for employer-sponsored retirement plans and within many 401(k) plans across the U.S., employees do not have exposure to ETFs.

To be clear, that is not Vanguard’s fault and as ETFs continue to make their way into more 401(k) plans, something that is gradually taking place, it is reasonable to presume Vanguard’s brand recognition and low-fee reputation will serve the firm well. [ETFs Gain Retirement Assets]

Even with the ongoing rise of its index mutual funds, five of the top-10 ETFs in terms of 2014 inflows are Vanguard funds. That group is comprised of the Vanguard S&P 500 ETF (VOO) , Vanguard FTSE Developed Markets ETF (VEA) , Vanguard Total Stock Market ETF (VTI) , Vanguard REIT ETF (VNQ) and the Vanguard Total Bond Market ETF (BND) . [A Beloved Dividend ETF]


ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.