Vanguard’s Spyder-Sense Is Tingling

Vanguard took on its friendly neighborhood SPDRman by launching a new ETF to track the S&P 500 Index and eight others based on S&P domestic stock benchmarks. It also launched eight new mutual funds based on S&P indexes.

With its reputation for being the low-cost provider among ETFs, the move puts Vanguard in head-to-head competition with the largest ETF in the world, the SPDR (SPY), State Street Global Advisors’ S&P 500 ETF, and iShares, the largest ETF firm in the world, which sells the S&P 500 Index Fund (IVV). The Vanguard S&P 500 ETF (VOO) features an expense ratio of 0.06%, making it the lowest priced ETF based on the S&P 500 Index. The other two ETFs each charge 0.09%.

The new offering is actually ETF shares of the firm’s flagship Vanguard 500 Index Fund, the industry’s first index mutual fund for individual investors. It launched in 1976. With $86.8 billion in net assets, the Vanguard 500 is currently the second-largest index mutual fund. Unlike the mutual fund, which has a $3,000 minimum investment, the new ETF requires no minimum investment and is cheaper than the fund’s 0.18% expense ratio. However, investors don’t pay a commission to purchase the mutual fund.

The launch also settles the Valley Forge, Pa., firm’s long-standing dispute with Standard & Poor’s. The contretemps date to back to 2000 when Vanguard filed with the SEC to create an ETF based on the S&P 500 without notifying Standard & Poor’s. Vanguard said its licensing deal for the 500 Index Fund covered this but S&P said no way and wanted to be paid a significantly higher licensing fee for any ETFs. Vanguard said no. S&P sued and Vanguard lost. Vanguard then decided to launch a series of ETFs based on MSCI indices. For the full story read ETFs for the Long Run, pages 46-47.

It appears years of young children and retail ETF investors asking, “Why doesn’t Vanguard have an S&P 500 ETF?” caused the firm to cave in and agree to pay more money.

The other new Vanguard funds with their expense ratios:
· Vanguard S&P 500 Value ETF (VOOV), 0.15%
· Vanguard S&P 500 Growth ETF (VOOG), 0.15%
· Vanguard S&P Mid-Cap 400 ETF (IVOO), 0.20%
· Vanguard S&P Mid-Cap 400 Value ETF (IVOV), 0.20%
· Vanguard S&P Mid-Cap 400 Growth ETF (IVOG), 0.20%
· Vanguard S&P Small-Cap 600 ETF (VIOO), 0.15%
· Vanguard S&P Small-Cap 600 Value ETF (VIOV), 0.20%
· Vanguard S&P Small-Cap Growth ETF (VIOG), 0.20 %

This gives Vanguard a family of 55 ETFs. The firm leads the ETF industry in net cash flow through August, with $23 billion. Of that, 74% went into equity ETFs, giving it 51% of the industry’s equity ETF positive cash flow, according to Bloomberg. For the 12 months ended in August, Vanguard’s ETF assets under management jumped 60% to $113 billion. Vanguard expects to launch 11 more ETFs this year, seven equity funds, three municipal bond funds and a real estate fund.

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