Vanguard Opens Up ‘New Front’ in ETF Fee War

September 11th at 11:00am by John Spence

Vanguard on Wednesday said it is planning a 1-for-2 reverse share split of its exchange traded fund indexed to the S&P 500 as the so-called ETF fee war takes a new turn.

“Vanguard expects the split to lower the overall transaction costs to buy and sell VOO shares,” the firm said in a press release. Shares of Vanguard S&P 500 ETF (ticker: VOO) will be offered on a split-adjusted basis on Oct. 24.

“We haven’t heard the last of the ETF fee wars,” said Daniel Wiener, editor of The Independent Adviser for Vanguard Investors.

“[T]he new frontier in low costs is the bid-ask spread and this morning’s announcement that Vanguard is going to do a reverse-split on its S&P 500 ETF shares means it’s swiftly going to halve the bid-ask disparity on the security—all things being equal,” Wiener said in a note Wednesday.

He said Vanguard’s decision to reverse-split VOO is a smart move.

“Will it really matter to the individual investor buying or selling a few hundred or even a few thousand shares of VOO? Probably not. But for the traders looking for every edge and every sliver of savings, it matters,” Wiener added. “Spreads are the new operating expenses in the fee wars …  today’s announcement of a reverse-split signals a new front in the contest for ETF market domination.”

VOO holds assets of about $11 billion and charges an expense ratio of 0.05%.

SPDR S&P 500 (NYSEArca: SPY) and iShares Core S&P 500 (NYSEArca: IVV) also track the U.S. blue-chip index. SPY and IVV charge fees of 0.09% and 0.07%, respectively, according to Morningstar. [Comparing Three S&P 500 ETFs]

VOO is the ETF share class of Vanguard’s S&P 500 index fund.

VOO’s reverse split will raise the ETF’s share price while cutting the number of shares outstanding. The overall value of VOO shareholders’ investments will not change.

Vanguard is saying that boosting the share price of VOO will reduce transaction costs because ETF investors will trade fewer shares. VOO was trading around $77 a share on Wednesday morning. SPY and IVV shares both trade just under $170.

“We made this move to lower the overall transaction cost of the ETF,” of which spreads are a part, a Vanguard spokesman said in an emailed statement Wednesday.  “It is consistent with our ongoing efforts to lower the cost and complexity of investing for all investors.”

Full disclosure: Tom Lydon’s clients own SPY.

Story updated to correct VOO assets under management.

The opinions and forecasts expressed herein are solely those of John Spence, 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.

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