Vanguard introduced its first exchange-traded funds (ETFs) in 2001. As the first quarter of 2017 nears completion Vanguard has amassed 670 billion dollars in ETF assets, becoming the second largest ETF provider in the United States. While this growth is interesting in and of itself, a look at how ETF asset growth compares to the firm’s index mutual fund growth offers an additional perspective on investor acceptance of the ETF medium.
Vanguard exchange-traded funds are unique in that the ETFs are structured as a share class of a mutual fund and not as a standalone entity. This structure allows us to view asset flows and asset growth by means of the ratio of ETF share assets to total fund assets.
In most instances Vanguard added ETF shares to an existing index mutual fund holding a legacy of mutual fund assets. When an ETF share class is added to an existing fund, the ETF percentage of fund assets begins at a minuscule level.
Since most Vanguard index funds have a considerable holding of low cost admiral and institutional shares, performance differences between ETF shares and mutual shares is low. Changes in the proportional share of the ETF is thus a result of larger marginal flows into the ETF.
Vanguard investors include individuals, investment advisors, and institutions. Investment advisors include both fee-only advisors, robo-advisors, and commission-based brokers. Given that advisors have been a growing constituent part of the Vanguard investor base, we might assume that they, especially commission-based advisors, are heavy users of ETFs.
Evidence shows that since their 2001 introduction, investment in Vanguard ETF shares has, on the whole, exceeded that of mutual fund shares. This trend is most notable in growth and value index funds.
Large Cap Stocks
Vanguard added a large cap index fund in 2004 to complete a suite of large cap funds. At the same time exchange-traded funds were added to the existing large growth and large value index funds. The steady growth in ETF share proportional representation in the style indexes is revealed in the chart and table below. The large cap blend fund has exhibited a fairly steady plurality of ETF share representation.
Table. Vanguard Large Cap Index Funds ETF/Total Assets
|Year||Large Cap||Large Growth||Large Value|
Mid cap stocks
Vanguard added growth and value mid cap indexes in 2006. These funds consist of investor shares, admiral shares, and ETF shares. ETF shares make up approximately half of the fund asset base.
The mid cap blend index added ETF shares in 2001. The fund possesses investor, admiral, institutional, and ETF share classes. The growth in ETF share ownership has grown to represent 20% of the fund base.
Table. Vanguard Mid Cap Index Funds ETF/Total Assets
|Year||Mid Cap||Mid Growth||Mid Value|
Small cap stocks
The small cap index funds have all exhibited growth in the proportion of ETF shares in the fund asset base. The small growth and small value funds added admiral shares in 2011.
Table. Vanguard Small Cap Index Funds ETF/Total Assets
|Year||Small Cap||Small Growth||Small Value|
The total market segment of funds includes Vanguard’s flagship Total Market Index Fund as well as the S&P 500 and extended market index funds, which are often used in combination to replicate a total market allocation. These funds were all introduced well before the advent of the ETF and had a significant mutual fund asset base in 2001.
The slow, steady growth in the total market index ETF proportion is notable for an additional reason. Vanguard employs investor shares of the fund in its suites of target retirement and lifestrategy funds. As of March 2017, these balanced funds hold over 343 billion dollars of assets. Thus growth in the weighting of ETF assets in the fund base indicates that ETF inflows have exceeded investor flows into both direct investment in mutual fund shares of the fund as well as investor flows into fund-of-funds.
A property rights dispute with S&P in 2000 – 2001 precluded Vanguard from issuing an S&P 500 ETF until 2010. Since then the ETF proportion of the fund base has risen to 20%.
Table. Vanguard Total Market Index Funds ETF/Total Assets
|Year||Total Market||500 Index||Extended Market|
We have concentrated our analysis on the most commonly used funds by investors. We should note that Vanguard also provides mega stock indexes (blend, growth and value) and two index funds that track US stock dividend indexes. These index funds have ETF share percentages ranging from 70% to 99% of total fund assets.
Vanguard also offers exchange-traded funds for S&P and Russell indexes tracking the US stock market. Some, but not all of these funds also offer institutional shares. Funds having institutional shares generally have ETF share class weightings below 50% of fund total assets.
Vanguard also offers 11 US sector indexes, all of which possess exchange-traded share class weightings exceeding 50% of fund total assets.
Data on all these indexes is available on this Google spreadsheet link.