Vanguard lowers fees on five ETFs as it chases Barclays

The Vanguard Group Inc. has slashed costs on five more exchange traded funds in its latest effort to play catch-up with Barclays Global Advisors. Last week, the Malvern, Pa.-based mutual fund indexing giant said that it has lowered management expenses on both its Small Cap Growth ETF and its Small Cap Value ETF to 0.11%, from 0.13%, and the expenses on its Growth ETF and its Value ETF to 0.10%, from 0.11%. Vanguard also lowered its expenses on its Europe-Pacific ETF to 0.12%, from 0.15%. The five ETFs have combined assets under management of $7.5 billion. Vanguard's price cuts are the third round of expense cuts since August. The firm has cut costs on 18 ETFs with a combined $21.3 billion of assets since that time.

PASSING ALONG SAVINGS

Barclays, the San Francisco-based producer of iShares ETFs, dominates the market, managing 53% of all U.S. ETF assets. Vanguard manages 6.8% of U.S. ETF assets, ranking it third behind State Street Global Advisors of Boston, which manages 25.5%.
The expense reductions represents a passing along of savings, which Vanguard does as a matter of course, said Richard Genoni, ETF product manager for Vanguard Financial Advisor Services. "It [results from] scale and growth of the product," and rivals should brace for further cuts, he said. The price cuts are a proven winner at Vanguard, said Burt Greenwald, a Philadelphia-based mutual fund consultant. "That's their cutting-edge marketing tool and it's proven successful," he said. "I think it will continue to be a persuasive advantage for Vanguard." Not surprisingly, financial advisers who invest heavily in ETFs welcome the cuts, said Scott Kubie, chief investment strategist for CLS Investment Firm LLC of Omaha, Neb. CLS manages $3.7 billion of assets and about half these assets are invested through ETFs, he said. "As a large user of ETFs, we're always happy — even when they cut by a small amount," Mr. Kubie said. Marie McGehee, spokeswoman for rival SSgA, declined to comment. Dan Dolan, Garden City, N.Y.- based director of wealth management strategies for Alps Distributors Inc. of Denver, which distributes Select Sector SPDRs, didn't return phone calls seeking comment. Price isn't the only consideration when buying an ETF, said Lance Berg, a spokesman for Barclays. "We remain confident in our value proposition of offering superior product, service and support to investors," he said. Mr. Genoni disagrees with Mr. Berg's claims of superiority. "Advisers consider us the leader in education in terms of how to use ETFs in their portfolios," Mr. Genoni said. Yet iShares funds have the additional advantage of greater liquidity, Mr. Kubie said. "[Barclays] tends to maintain the right volume, which makes [iShares'] trading costs quite a bit lower," he said. Greater liquidity makes the "all-in" costs of owning and trading iShares lower than those of rival ETFs with lower management costs, Mr. Kubie added. ETFs from Vanguard and smaller producers can cost much more to trade when their shares aren't in a broker's inventory and must be created on the buyer's behalf, he said. "In some cases, it's true [that Vanguard has less liquidity and higher trading costs on comparable ETFs], but in many cases, it isn't," Mr. Genoni said. Kim Arthur, chief executive of Main Management LLC, agrees. "If you put in a limit order, [liquidity-related problems] won't be an issue, and it's irrelevant if you're holding for the long term," he said. Main Management of San Francisco manages about $250 million, mostly with ETFs. Yet illiquidity can be quite relevant for smaller orders of less liquid ETFs, said Blaine Docker, the company's chief operating officer. "If [0.2%] is the expense ratio of the ETF and there's a 2% difference in the bid and ask, you're going to get killed" if you get your order filled at the ask price, he said. Vanguard's average ETF expenses are 0.16%, compared with 0.53% for the rest of the industry. Brooke Southall can be reached at bsouthall@crain.com.