ETF Expert

Who doesn’t appreciate a good analogy? State Street ETFs are to U.S. markets as Vanguard ETFs are to emerging markets. Put another way, iShares ETFs are to 30-year olds as Vanguard ETF are to teenagers.

Yep… Vanguard ETFs are rapidly growing. Recent ETF inflow/outflow data for the first 3 quarters show that Vanguard picked up nearly $18 billion in new assets, a startling 23% of its total under the Vanguard wrapper. iShares’ inflows over the same time frame corresponds to 8% of the firm’s total net and State Street has experienced net outflows.

Year-over-year? iShares and State Street SSgA grew 23% and -5% respectively. Vanguard? The low-cost leader packed a 66% wallop!

Truth be known, most of Vanguard’s victory is attributable to a few core funds, like Vanguard Emerging Markets (VWO) and Vanguard Europe Asia Pacific (VEA), Vanguard Total Bond Market (BND) and Vanguard Total Stock Market (VTI). It seems that lower-cost exchange-traded funds providing exposure to identical or highly correlated indexes have found their audience.

Yet cost is only one factor for ETFs. Annual yield, trade-ability and index tracking error can all impact performance. So I thought I’d take a look at these 4 big-time Vanguard holdings since their inception dates, and compare them to the largest iShares rival. Over time, was Vanguard’s cost structure enough to result in better long-term performance?

In truth, I may have expected to see the largest discrepancy in the emerging market arena. Four-and-a-half years may have been enough time to show an impact of cost and tracking error. But alas, in the time period viewed, EEM and VWO came out identical.

Vanguard Europe Asia Pacific (VEA) tracks the exact same index as EFA. In the brief period studied, VEA outperformed. And while Vanguard Total Stock Market (VTI) doesn’t track the same index as the iShares Russell 3000 (IWV), the intent for total stock exposure is the same; VTI provided more bang for the total U.S. buck.

I may be less inclined to give kudos to BND over AGG, however. U.S. Treasuries are far more prevalent in the Vanguard Total Bond make-up. It follows that in the short-time period studied, entirely bear-market data at that, I wouldn’t be too quick to deem iShares Aggregate Bond (AGG) the inferior ETF.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

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