Vanguard Won't Topple iShares, Not Soon Anyway

With football season here, talk of rivalries will soon be upon sports fans. Avid followers of the exchange-traded products industry are treated to rivalries on a daily basis, but there is one that grabs most of the attention. That being the competition between BlackRock's BLK iShares unit, the largest ETF sponsor, and Vanguard, the third-largest ETF issuer. Vanguard is a relatively new entrant to the ETF arena, but its rise to stardom has been nothing short of impressive. Rock-bottom fees on its sector and broad market ETF have helped Vanguard pilfer assets from rivals such as iShares. Commission-free trading on Vanguard ETFs for the firm's clients has helped, too. Bottom line: Vanguard had almost $220.6 billion in AUM as of September 5, according to Index Universe data. Said another way, the next 10 largest ETF sponsors could have their AUM totals combined and the number would still be far below Vanguard's. Vanguard is big in ETFs. iShares is bigger...a lot bigger. With all the speculation that the former will topple the latter, critical facts are being overlooked and those facts go beyond the $200 billion AUM chasm between the two firms. Yes, Vanguard (and other ETF sponsors for that matter) has a primary advantage over iShares in terms expense ratios. Cost is exactly the reason why the Vanguard MSCI Emerging Markets ETF VWO long ago wrestled the crown of largest emerging markets ETF away from the iShares MSCI Emerging Markets Index Fund EEM. Even today it is obvious that iShares has been slow to learn its expense ratio lesson. As just one example, the annual fees on the iShares Dow Jones U.S. Energy Sector Index Fund IYE are 0.47 percent. The Vanguard Energy ETF VDE charges just 0.19 percent. A Good Starting Point It is the topic of fees that is a good starting point for why Vanguard has its work cut out for it in terms of becoming home to more AUM than iShares. Part of the issue is that the Vanguard vs. iShares tussle all but ignores State Street's STT State Street Global Advisors (SSgA), the second-largest ETF sponsor. To use another sports analogy, if Vanguard and iShares were running the 100-meter dash in the Olympics, the commentators would be ignoring the silver medal winner (SSgA) while implying the bronze medal winner (Vanguard) stands a better chance of winning gold in the next Olympics. And if it is a matter of cost, than SSgA wins in terms of sector funds. All of the sector SPDRs, familiar ETFs such as the Financial Select Sector SPDR XLF and Technology Select Sector SPDR XLK, are cheaper than the comparable Vanguard ETFs. Sure, the difference is just one basis point, but the select sector SPDRs are still cheaper than the Vanguard equivalents. In addition, SSgA issues products that Vanguard does not have and even if the latter decided to encroach on the territory of some of these funds, the uphill climb would be incredibly steep. For example, the SPDR Gold Shares GLD has $70.2 billion in AUM, making it the second-largest ETF in the world of any kind. Vanguard has no GLD equivalent. Yes, SSgA has been in the ETF game longer and funds such as GLD and the SPDR S&P 500 SPY have given the firm a nice first mover advantage. As of September 5, SSgA had almost $300.3 billion in AUM, the Index Universe data show. That is an almost $80 billion lead on Vanguard. The market cap of General Mills GIS could be multiplied three times and the resulting number still would not be enough for Vanguard to pass SSgA. Other Advantages There are other factors that indicate a toppling of iShares by Vanguard will either take more years than most care to admit or will never come to pass. Yes, VWO has crushed EEM on the basis of lower fees, but Vanguard's emerging markets lineup is not extensive. With the exception of a few country funds issued by other providers, iShares is THE name when it comes to emerging markets ETFs. That is not to say the iShares MSCI Brazil Index Fund EWZ or the iShares FTSE China 25 Index Fund FXI are the best ETFs tracking those countries, but they are the ones investors are most familiar with. Despite the success of VWO, Vanguard has not gone deeper into the emerging markets arena. Next is the issue of commodities ETFs, which was mentioned in relation to GLD. iShares has the most popular GLD rival in the form of the iShares Gold Trust IAU and the dominant silver ETF in the iShares Silver Trust SLV. Vanguard has no SLV answer, either. Another area where Vanguard will have a tough time getting to the second spot, let alone passing iShares, is bond ETFs. To be certain, Vanguard's bond ETF lineup is stout and features plenty of low-fee options. That lineup also lacks a worthy competitor to the iShares iBoxx $ High Yield Corporate Bond ETF HYG and the SPDR Barclays Capital High Yield Bond ETF JNK. Vanguard also currently lacks some of the niche bond concepts some ETF sponsors have rolled out this year. The firm offers no international high-yield bond ETFs, but iShares and Van Eck's Market Vectors do. Vanguard has no bond fund devoted to emerging markets corporate debt. WisdomTree WETF, iShares and SSgA all have funds that focus on that niche. None of this is to say Vanguard is irrelevant. It certainly is not and investors have benefited from the firm's growing presence in the ETF industry. Vanguard will continue playing a pivotal role in the ETF universe and investors will continue to enjoy the benefits of the firm's low-cost funds. All of that can happen from Vanguard's perch as the third-largest ETF firm, the place it is likely to stay for quite a while. For more on ETFs, click here.