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The Rise Of An ETF Giant

Devin Riley


iShares has been a big player in the space since its initial product launch—originally branded as World Equity Benchmark Shares (WEBS)—in 1996.

Over the past decade, the firm has become synonymous with low-cost index funds, and offers passive index-tracking ETFs in everything from U.S. and international stocks to bonds and commodities.

The strategy has paid off:iShares is the largest ETF issuer in the world . And by a large margin, too. The San Francisco-based unit of BlackRock manages $488 billion, or about 41 percent of all U.S.-listed ETF assets. The No. 2 firm, State Street Global Advisors, controls about a quarter of the assets.

But a lot has changed since the old days. For one, the market has grown, with ETF assets now nearly $1.2 trillion today.

More importantly though, a single big threat to iShares dominance has emerged:Vanguard.

The mutual fund giant has elbowed its way into the exchange-traded fund world. It’s the No. 3 ETF firm by assets and, assuming present trends continue, it is clearly threatening to take over as the reigning ETF issuer.

A Changing Battlefield

We’ve written before about the threat Vanguard poses to iShares , but 2012 is shaping up to be the year when Vanguard surpasses iShares in a number of important pockets of the ETF market where the two firms offer competing products.

The first big victory for Vanguard came in 2011, when the company’s MSCI Emerging Markets ETF (VWO) overtook the iShares fund that tracks the exact same index, the iShares MSCI Emerging Markets Index Fund (NYSE Arca:EEM). While both are still big funds—they’re both over $30 billion—VWO has run away with the assets, and now has $14 billion more than EEM.

Since that victory, Vanguard’s growth has steadily continued.

The firm has overtaken more market segments iShares this year, becoming the biggest aggregate U.S. bond fund. The Vanguard Total Bond Market ETF (BND) now has $17.64 billion, while the iShares Barclays Aggregate Bond Fund (AGG) has about $15.5 billion.

Vanguard now also has the biggest high dividend yield fund, as the Vanguard Dividend Appreciation ETF (VIG) overtook the iShares Dow Jones Select Dividend ETF (NYSE Arca:DVY). VIG now has about $11.3 billion to DVY’s $10.65 billion.

Looking at flows data from this year, Vanguard is gaining even in segments where iShares holds the lead. Vanguard’s MSCI EAFE ETF (VEA) has gained more than a billion dollars this year, while the iShares fund tracking the same index (EFA) has lost more than $2 billion. Still, EFA remains the far bigger fund, with almost $34 billion in assets, compared to $8.35 billion for Vanguard’s VEA.

In other cases, Vanguard is cementing a lead it has already established:Vanguard’s Utilities ETF (VPU) has gained $100 million this year, while iShares’ (NYSE Arca:IDU) has lost $68 million. VPU now has $1.19 billion and IPU is an $735 million fund.



Score A Big One For iShares

That said, iShares still has some cards up its sleeve.

For one, the firm has shown more willingness to branch into esoteric parts of the market:areas like single-country ETFs—Peru, anyone?—and emerging markets sectors.

That single-country focus and dominance goes back to the mid-1990s—literally at the beginnings of the ETF industry.

The firm is also likely to continue market leadership in commodities ETFs which have so far been untouched by Vanguard.

Vanguard seems old-guard in some ways, which has brought it late to international debt, both developed and developing. But it does have two funds in registration targeting those two markets, which I wrote about in a blog last year I titled “Vanguard Blesses Foreign Debt.”

But those funds aren’t live yet, and it seems doubtful Vanguard will ever grant its benediction to single-country ETFs.

But if recent asset-gathering trends continue, it seems Vanguard may end up dominating in international debt as well as that asset class grows in popularity among investors.

Because for products with mass-appeal, it looks increasingly likely that low-cost Vanguard, not iShares, will be the go-to ETF provider.

At the time the article was written, the author had no positions in the securities mentioned.

Contact Devin Riley at driley@indexuniverse.com.


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