ETF Industry Chasing Vanguard for Inflows

Today the Wall Street Journal reported that Vanguard Group – pioneers of passively managed ETFs – has taken in a record amount of cash through October as investors continue to show preference for ETFs that track indexes and other benchmarks.

The largest provider of index-tracking products reported that is has taken in $196 billion from investors through the end of October. That is up from $163 billion last year when Vanguard enjoyed its best-ever year.

These numbers are likely to just fan the flames of the fee-war that has been a race to the bottom of expense ratios. Last week BlackRock, the largest provider of ETFs, announced that it will be slashing fees on seven of its iShares Core ETFs as low as 0.3%.

Why the race? Investors time and time again have shown a preference for low cost over active management. Morningstar data shows that investors pay just about 18 cents per hundred dollars invested in Vanguard products versus $1.23 for average actively managed funds and 89 cents for the average passive fund, according to the Journal’s review.

As the democratization of information has increased more and more through the internet, more tools have become available and lower cost financial advice has come ubiquitous investors have become savvier and know that higher costs nullify many of active management’s potential benefits. The Journal reports that just 41.4% and 23.3% of active stock and bond funds, respectively, were beating their benchmarks through the end of last month. A Morningstar analyst told the Journal, ““Passive-investing has continued to really beat active. The spread has continued to widen out.”

Vanguard has amassed $3.4 tillion in assets by regularly setting records for investor inflows and other players are paying attention. Goldman Sachs entered the foray last month with bold, low prices on its introductory ActiveBeta ETFs (Goldman Fuels ETF Fee War). This year Vanguard’s Total Bond Market Index (NYSEarca: BND) surpassed the long-time king of bond ETFs, PIMCO Total Return Exchange-Traded Fund (NYSEarca: BOND). 

A lot of things in the ETF marketplace are just unpredictable. The one thing that seems to be right as rain is the outflows from active management to passive and its the main driver behind the new entrants to the market and plunging pricing. Money talks and $135 billion pulled out of actively managed U.S. equity funds and $20.6 billion pulled from active bond funds is going to drive issuer action. Vanguard positioned itself as the passive manager before the tide turned and its continuing to pay dividends for them as the winds have changed.