(Bloomberg)--Vanguard Group Inc., the third- biggest provider of exchange-traded funds, gained ground on larger competitors this year after gathering ten times as much money into its ETFs than the rest of the U.S. industry combined.
Vanguard attracted $12.6 billion, or more than 90% of the money gathered by all U.S. ETFs in the quarter ended March 28, according to data compiled by Bloomberg. Clients pulled $17 billion from ETFs run by State Street Corp., including $17.7 billion from the SPDR S&P 500 ETF Trust, known as the Spider.
Vanguard, started almost four decades ago by John C. Bogle, has been able to attract steady deposits from savers by offering low-cost funds, a strategy that helped it become the largest mutual-fund provider. A latecomer to ETFs in part because Bogle was opposed to them, the firm has been narrowing the gap with industry leaders such as BlackRock and State Street, whose products are popular among fickle institutional investors such as hedge funds that seek ways to trade in and out of markets quickly.
“We think Vanguard’s market share is going to grow and in the very near future can take over the Number 2 spot from State Street because they have a broad array of successful products,” Todd Rosenbluth, director of mutual-fund and ETF research at S&P Capital IQ in New York, said in a telephone interview.
Individuals, or retail investors, are drawn to Vanguard funds for their lower fees, while institutional users gravitate to more actively traded products for their liquidity, which reduces trading costs, said Ben Johnson, director of passive funds research at Morningstar Inc.
Founded by Bogle in 1975, Vanguard became the first firm to make index funds available to retail investors. By spreading money across the entire stock market at low cost, Bogle argued that investors could beat the vast majority of stock-picking fund managers. Vanguard’s philosophy has helped it attract assets and catapult it into the largest mutual-fund manager, running five of the 10 biggest U.S. mutual funds.
Vanguard started pushing into ETFs more than a decade ago as it sought to bring that same idea to the fastest-growing area of the asset management industry. Its ETFs are run as share classes of mutual funds, a structure Vanguard patented.
Assets at Vanguard’s U.S. ETFs have surged at a faster rate than at BlackRock and State Street, advancing 68% over the past two years to $345 billion, according to data compiled by Bloomberg. BlackRock, the biggest provider of ETFs, increased U.S. assets by 33% to $668 billion and State Street, the second-largest, saw a 27% increase to $379 billion.
Vanguard is owned by its fund shareholders, making it essentially a non-profit company. Instead of distributing profits, it reduces fees charged to shareholders when revenue projections exceed those for expenses. Vanguard’s ETFs carry an average annual expense ratio of 0.14%, less than half of the 0.40% charged by BlackRock and 0.36% for State Street, according to data compiled by Bloomberg.
The Vanguard FTSE Europe ETF gathered $2.1 billion in the first three months of the year, becoming the most popular fund in the quarter.
The $157 billion Spider, the largest ETF, was the biggest loser in the past three months, reversing its position as the best-selling ETF in the prior quarter. It attracted $21.1 billion the last three months of 2013, helping State Street lead all ETF providers in that period with $25.3 billion in net deposits.
BlackRock, the world’s largest money manager, took in $2.7 billion in the recent quarter, following $24.1 billion in deposits in the last three months of 2013. Its biggest ETF, the $53.6 billion iShares MSCI EAFE ETF, gathered $828 million in the first quarter. It invests in developed markets outside the U.S.
Investors’ interest in Vanguard ETFs was steadier, following $17.5 billion in deposits in the fourth quarter. Valley Forge, Pennsylvania-based Vanguard ran the three most popular ETFs in the quarter and six of the top 10.
Fidelity Investments, the second-biggest mutual fund company, took in $217 million after opening a group of single- industry ETFs in October, marking its first dedicated effort to break into the field. Its ETFs hold $871 million.
ETFs are investment funds that can hold stocks, bonds, commodities or other securities. Unlike mutual funds, their shares trade on an exchange like common stocks. They have grown in popularity among investors because of their tradability, low cost relative to mutual funds and tax efficiency. More than 99% of ETF assets track an index.
Investors poured $10.9 billion into fixed-income funds in the quarter. Bond demand surged and stocks dropped in January as investors worried about slowing in emerging economies and looked for havens. Equity ETFs gathered $2.4 billion, including $735 million for those focused on U.S. stocks.
Behind Vanguard, the next biggest asset-gatherer in the quarter was First Trust Corp., a Wheaton, Illinois-based provider with $23.5 billion in ETF assets. It collected $3.6 billion, led by the Health Care AlphaDEX Fund, which captured $395 million. The fund tracks a variation of the Russell 1000 Health Care Index that weights stocks according to factors indicative of profit growth, including three, six and 12-month price appreciation, according to the firm’s website. The fund more than doubled in assets in the past year to $1.9 billion.
First Trust specializes in funds that represent a hybrid of active and passive investment strategies, known as fundamental indexing or smart beta. Such funds track indexes designed to outperform traditional benchmarks that weight their constituent holdings according to market capitalization. The indexes may weight securities equally or filter a traditional index to more heavily weight holdings with a history of higher dividends, lower volatility or other factors.
“There’s been a lot of publicity around smart beta, good and bad, and, frankly, that can generate flows even if it’s negative,” Nigel Brashaw, an asset-management partner in Boston at PricewaterhouseCoopers LLP. Brashaw said he expects smart beta assets to grow significantly in the coming year.
Smart beta funds accounted for about 18% of U.S. ETF assets at the end of 2013, including exchange-traded notes, and grabbed 31% of ETF net deposits in the year, according to Morningstar’s Johnson.