In the battle for the top spot among ETF managers, 2022 has so far belonged to Vanguard.
According to figures from ETF Database, as of March 14, BlackRock was managing almost $2.3 trillion in ETF assets. Vanguard had almost $2 trillion. But the gap between the two is narrowing as Vanguard’s inflows have been near $85 billion over the last three months, compared to BlackRock’s $36 billion.
And Ben Johnson, director of global ETF research for Morningstar, reports that in the first two months of 2022, Vanguard has brought $26 billion more into its ETFs than the rest of the top 10 ETF issuers combined.
All this has led some to predict that Vanguard may overtake BlackRock as the top ETF issuer within a few years.
Earlier this month, Bloomberg, using the company’s own research, predicted that Vanguard would surpass BlackRock as the top ETF manager sometime in the next two years.
But Johnson and others say that for a few reasons, the current trends may not hold.
“That premise is based on extrapolating current trends, which is usually a mistake,” Johnson said. “A lot of what we’ve been seeing just has to do with what we see going on in the markets more broadly. We’re seeing volatility we haven’t seen since the first quarter of 2020 (when the pandemic hit),” he said.
Johnson said in tough times, Vanguard investors remember the words of founder Jack Bogle — stay the course.
“The makeup of Vanguard’s investor base tends to be more long-term allocators, either individuals or advisors working with people with long-term objectives,” he said. “They’re going to stay in the market no matter what.”
Mike Akins, founding partner of ETF Action near Denver, Colorado, agreed, saying Vanguard’s products “are not trading vehicles. Their business model is to create strategies that you buy and hold, so there is less volatility in their AUM,” he said.
By contrast, Johnson said, the investor base of BlackRock’s iShares is much broader. He said it includes institutions that may use those ETFs for shorter-term, more tactical purposes such as making trades depending on the direction of interest rates, inflation or recessions.
Johnson and Akins pointed out that Vanguard’s mutual funds have an ETF class — a structure unique to Vanguard that is actually patented — that allows investors to make tax-free exchanges of their other classes of fund shares into the ETF class, boosting inflows.
“You could almost accuse Vanguard of doping,” said Johnson. “You could say they’re the Mark McGwire of ETFs, padding their stats by prodding many investors to convert their Admiral shares to ETF shares. They are uniquely positioned to do so with this novel structure.”
There is actually a small economic incentive to switch, Johnson said, since the ETF share classes cost even less than other share classes.
Vanguard spokesman Freddy Martino said less than 4% of the company’s ETF flows are from mutual-fund-to-ETF conversions, however.
But Akins said the advantage of Vanguard’s setup isn’t really reflected in that 4% figure.
“It’s a big advantage because it keeps people in their ecosystem, contained in their product lineup,” he said. If an investor wanted to do the same at BlackRock, he or she would have to sell their shares and buy ETF shares. That investor might stay with Black Rock, or not, Akins said.
Akins noted that the patent on Vanguard’s fund structure expires in 2023.
Martino didn’t address what actions Vanguard may take when it expires, only saying that “our current patent protection requires other firms to receive permission to license the multiple-share structure. Once it expires, firms no longer need to obtain permission from Vanguard, but they would still need to receive exemptive relief from the SEC.”
Another draw of the ETF share class, Johnson said, is if an investor can’t meet the $3,000 minimum required for the Admiral shares, for instance. In that case, they can buy any amount of the ETF share class.
“They’ve created a good mousetrap to capture flows, and they hang onto them,” he said.
