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Lower fees for ETFs over mutual funds may lie behind Vanguard asset boost

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Some controversy has sprung from the announcement earlier this week that in the clash of the US ETF Titans, Vanguard’s assets had overtaken those of BlackRock.

Some controversy has sprung from the announcement earlier this week that in the clash of the US ETF Titans, Vanguard’s assets had overtaken those of BlackRock.

The widely reported gap in assets between the two was no slim margin, with Vanguard reporting inflows of USD90.4 billion over the first half of the year in its US ETF business, beating its ETF rival BlackRock which gathered ETF inflows of USD60.4 billion.

However, questions have been raised, with Morningstar’s Director of Global ETF Research, Ben Johnson, writing on Twitter that the Vanguard inflows were coming ‘from inside the building’.

Johnson says: “A portion of the net inflows into Vanguard’s ETFs over the past year can be attributed to shareholders of the funds’ Admiral share class converting to the ETF share class. This likely accelerated after the firm re-priced the ETF share class of many of its funds such that the ETF share class fee is now marginally lower than the fee charged by the Admiral shares. This took effect over the past year.”

Vanguard started offering conversions from mutual funds to ETFs in its Admiral range in early 2019, with the result that, for the first time, the ETF share class of some of these funds are lower than their mutual fund equivalent.

Allan Roth, writing in ETF.com on March 19th 2019, said of the conversions: “I quickly saw that my favourite Total International Stock Index Mutual Fund (VTIAX) was left with a 0.11 per cent annual expense ratio, 0.02 percentage points higher than its ETF share class (VXUS).”

For its part, Vanguard claims that the conversion offer has had little impact. A statement from Vanguard says: “Mutual fund to ETF conversions have been an option for Vanguard clients for some time now … We aren’t disclosing the exact dollar value of assets that clients have chosen to convert from mutual funds to ETFs.”

Bloomberg also commented, saying: “But Vanguard’s ETF inflows were coupled with outflows from its long-term mutual funds. Driven by withdrawals during the market swoon in March, the funds had more than USD20 billion in net redemptions this year through May.”

Bloomberg also warns: “Vanguard structures its ETFs as an arm of its mutual funds, a format it patented. The firm’s ETF lineup may be poised to see another bump in the near future. Vanguard plans to convert some mutual fund holdings to lower-cost ETF shares for clients of its advisory business, spokesman Freddy Martino confirmed.”

Morningstar’s Johnson believes that inflows into the firm’s ETFs that are a result of conversions have no effect on their overall assets. 

“They are simply taking money out of one pocket and putting it into another. Given that converting investors are now paying lower fees, this is a win for them,” he says, adding that in the wider context of the ETF industry, it’s further evidence that ETFs are increasingly becoming the investment wrapper of choice for an ever larger number of investors. 

Johnson concludes: “As for Vanguard, the investment wrapper that their founder refused is increasingly becoming a cornerstone of their global business.”

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