Vanguard Declares War in Fight for Broad Market ETF Supremacy

Vanguard launched nine new ETFs on September 9, 2010 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 new funds.  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) (VOO summary) has an expense ratio of 0.06% and will directly compete with SPDR S&P 500 (SPY) and iShares S&P 500 (IVV), which both have a 0.09% expense ratio.
• Vanguard S&P 500 Growth ETF (VOOG) (VOOG summary) has an expense ratio of 0.15% and will directly compete with iShares S&P 500 Growth (IVW) which has a 0.18% expense ratio.
• Vanguard S&P 500 Value ETF (VOOV) (VOOV summary) has an expense ratio of 0.15% and will directly compete with iShares S&P 500 Value (IVW) which has a 0.18% expense ratio.
• Vanguard S&P Mid-Cap 400 ETF (IVOO) (IVOO summary) has an expense ratio of 0.15% and will directly compete with SPDR S&P MidCap 400 (MDY) which has a 0.25% expense ratio and iShares S&P MidCap 400 (IVW) which has a 0.20% expense ratio.
• Vanguard S&P Mid-Cap 400 Growth ETF (IVOG) (IVOG summary) has an expense ratio of 0.20% and will directly compete with iShares S&P MidCap 400 Growth (IJK) which has a 0.25% expense ratio.
• Vanguard S&P Mid-Cap 400 Value ETF (IVOV) (IVOV summary) has an expense ratio of 0.20% and will directly compete with iShares S&P MidCap 400 Value (IWS) which has a 0.25% expense ratio.
• Vanguard S&P Small-Cap 600 ETF (VIOO) (VIOO summary) has an expense ratio of 0.15% and will directly compete with iShares S&P SmallCap 600 (IJR) which has a 0.20% expense ratio.
• Vanguard S&P Small-Cap 600 Growth ETF (VIOG) (VIOG summary) has an expense ratio of 0.20% and will directly compete with iShares S&P SmallCap 600 Growth (IJT) which has a 0.25% expense ratio.
• Vanguard S&P Small-Cap 600 Value ETF (VIOV) (VIOV summary) has an expense ratio of 0.20% and will directly compete 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 all 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 hodge-podge 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.

Disclosure covering writer, editor, and publisher:  Long IJH.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.