While some forecast Vanguard could overtake BlackRock as the largest ETF issuer within the next decade, the firm has yet to break into the top three in Europe. Can it climb the ranks and if so, what will drive this shift?
Unlike its foundational role in index funds under founder and chairman Jack Bogle, Vanguard has largely been happy to waive the role of first mover when it comes to ETFs.
In his Little Book of Common Sense Investing, Bogle said the pioneer of the first ETF, Nathan Most, approached him with an offer to list the first ETF in the US, however, Bogle turned down the offer in a decision that paved the way for the arrival of State Street Global Advisors’ headline SPDR S&P 500 ETF Trust (SPY).
“The late Nathan Most, a fine man, initially offered to partner with Vanguard, using our S&P 500 index fund as the trading vehicle,” Bogle said. “Since I see trading as a loser’s game for investors and a winner’s game for brokers, I declined his offer. But we parted friends.”
Explaining the decision to forgo the opportunity, a Vanguard spokesperson told ETF Stream the initial reluctance surrounding ETFs was due to the behavioural tendencies they facilitate, which do not chime with the firm’s mantra of disciplined, long-term investing.
After comparing ETFs to a “wolf in sheep’s clothing”, Bogle said: “There is nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you do not trade them.”
Eight years after SPY’s arrival, the company would launch the now $289bn Vanguard Total Stock market ETF (VTI) as a share class of its global equity mutual fund – in a previously patented process.
Entering European ETFs
It would take another 11 years for Vanguard to enter European ETFs in 2012 and another 11 years for its UCITS ETF range to break the $100bn assets under management (AUM) barrier.
When asked about Vanguard’s relatively late entry into the market, its head of product specialism Mark Fitzgerald told ETF Stream the build-out of the business was a case of organic growth.
“We do not buy market share by acquiring an incumbent, which is the typical global asset manager model. It simply takes time, you start with the core exposures in mutual funds – our global stocks fund is 25 years old, as is our position in Europe – then you look at a combination of building blocks and move on to ETFs,” Fitzgerald said.
“Products also require seed to launch with a tight tracking error. That means a certain level of AUM is needed from seed funding provided by our shareholders – which, not being a traditional asset manager – are our clients.”
Vanguard has climbed to the fourth-largest ETF issuer by AUM in Europe with only 34 products. Combine the product suites of the three issuers above them – BlackRock, Amundi and DWS – and their amalgamated range comes to more than 1,000 ETFs in Europe alone.
“Our sweet spot is a smaller number of core, diversified products at low cost, which will build the core of your portfolio,” Fitzgerald added.
“The others can then produce the more niche products, which consequently may be smaller and highly likely to be uneconomic.”
The firm’s European ETF range is currently under half the size of the 75-strong suite in the US and only a small part of its 181 ETFs globally. However, even this number pales in comparison to the 1,051 in the iShares, 265 SPDR, 410 Invesco, 390 Amundi and 300 Xtrackers ranges, respectively.
Robyn Laidlaw, head of European distribution at Vanguard, said: “We are focused on the end investor and intermediary that serves them – we build products that serve as either portfolio construction tools or total portfolio solutions. We are not interested in launching products for every trend or launching products for the sake of gathering assets.
“The evolution of the business in Europe has been one of initially serving institutional investors and now it is more focused on servicing intermediaries from banks to insurance companies to other asset managers, all the way down to end retail customers in Germany and the UK.”
Vanguard’s European growth vectors
Speaking on the catalysts for Vanguard to leapfrog into the European top-three, Laidlaw said: “Direct to retail or retail advised opportunity in Europe is significant because this is a group that has not really participated in ETFs to a significant degree thus far.”
While around half of all advised and non-advised retail portfolio assets in the US are in index-tracking funds, this number was under 10% in the UK eleven years ago. Laidlaw estimated this is heading towards 30% but many countries in mainland Europe are far behind.
“European investors are not participating in the benefits of indexing at a retail level. A lot of that is to do with the delivery of financial advice in these markets,” she said.
The UK’s Retail Distribution Review (RDR) has created a fee-based advice market with advisers acting as financial planners rather than product salespeople. This aligns client and adviser interests and makes index-based products a more likely option given their low cost.
“In Europe, by contrast, a retrocession-based environment still exists. This means retail participation in ETFs remains quite low – and has significant upside,” Laidlaw added.
“Under the retail investment strategy review, although a ban on retrocessions will be on execution-only rather than outright, that means ETFs will stand as good a chance on digital trading platforms.”
Speaking on the digital opportunity, she said ETF saving plans in Germany have been an important “green shoot” in the story of distributing to retail, while Vanguard also wrapped its popular LifeStrategy fund of funds range in ETFs to offer exposure to European retail clients in 2020.
On whether the firm would consider following in the footsteps of BlackRock and its partnerships with neo-brokers Scalable Capital and Bux, Laidlaw said: “We do not have any details of partnerships, but we speak to a lot of people in the UK, Germany, Italy and Switzerland who are really interested in these types of solutions.
“If we thought there was a way we could work together to get these kinds of solutions out to clients in Europe under a partnership model, we would be very interested in exploring that further.”
On the product side, it has been little secret Vanguard in Europe has been primarily focused on low-cost, index-tracking core building blocks. Fitzgerald noted active ETFs may be of interest if the firm can see the products improving the offering for its European clients.
“We would definitely have active as an area of interest. We have a long-term, careful and cautious global product plan but there are other things we look at – where the market is, what competitors are doing and where we might one day go.
“We are the third-largest active fixed income manager globally and we are the biggest buyer of sub-advised active equity management in the world. Active will not be off the table in ETFs, but we will have to understand if it serves a purpose.”
Little over a decade after its arrival into UCITS ETFs, Vanguard may not yet have replicated the grand stature of its US ETF platform, but plenty of runway for additional products and new clients suggests this could just be a waiting game.
