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Rating:Vanguard Makes Play for ETFs Not Rated 5.0 Email Routing List Email & Route  Print Print
Thursday, July 31, 2003

Vanguard Makes Play for ETFs

by: Sean Hanna, Editor in Chief

Barclays and State Street watch out, Vanguard is edging into your space. That was the unmistakable message Vanguard today sent to the San Francisco and Boston-based leaders in ETFs when registered a bevy of new funds and amended the prospectuses of its index offerings to allow Viper shares across all of its passive funds. Through the registrations Vanguard also revealed its intent to roll out ten sector-based index funds this fall along with a new large-cap stock index fund.

Vanguard's New Sector Lineup
New Sector Vipers
Vanguard Energy Index Fund
Vanguard Materials Index Fund
Vanguard Industrials Index Fund
Vanguard Consumer Discretionary Index Fund
Vanguard Consumer Staples Index Fund
Vanguard Health Care Index Fund
Vanguard Financials Index Fund
Vanguard Information Technology Index Fund
Vanguard Telecommunication Services Index Fund
Vanguard Utilities Index Fund
Other New Vipers
Vanguard Value Index Fund
Vanguard Growth Index Fund
Vanguard Mid-Cap Index Fund
Vanguard Small-Cap Index Fund
Vanguard Small-Cap Value Index Fund
Vanguard Small-Cap Growth Index Fund
Vanguard European Stock Index Fund
Vanguard Pacific Stock Index Fund
Vanguard Emerging Markets Stock Index Fund
All counted, the number of Vanguard Vipers will expand to 22 from two today when all of the new products are launched.

Gus Sauter, Vanguard's chief investment officer, said that the new funds are intended to broaden Vanguard's lineup to become a full suite of index offerings. He also explained that Vanguard would be the first firm to offer funds with both traditional and exchange-traded shares on a broad range of benchmarks.

However, at least one Vanguard watcher thinks the move is also part of Vanguard's effort to boost its bottom line by capturing a share of the ETF asset flow that is now going to both Barclays iShares and the State Street SPDRs.

Dan Weiner, editor of The Independent Adviser of Vanguard Investors notes that Chairman Jack Brennan has a goal for Vanguard's Partnership Plan dividend to reach $100 by 2005. To hit that mark, Vanguard has to increase its dividend by nearly 20 percent per year.

"To do so profits have to soar, and gaining market share is one means of accomplishing that goal," says Weiner.

Vanguard's plans to add to its roster of sector funds are also a reversal from its strategy in the later years of the Jack Bogle era at Vanguard. After rolling out a number of sector funds in the Eighties, then -Chairman Bogle later reconsidered that decision and closed a number of the Vanguard sector funds. Bogle has recently fingered the addition of sector funds as one of his biggest mistakes.

Now Brennan, not Bogle, is running the ship at Vanguard and it appears that the firm will revisit the eighties. Although, this time Vanguard will offer indexed sector funds rather than an actively managed flavor of the product. Currently, the largest remaining sector fund is Vanguard's health care fund that is actively managed.

The ten new indexed sector funds will also include a health care offering. All of the funds will be pegged to benchmarks from Morgan Stanley Capital International family of indices. They will also came in Admiral class shares for investors making deposits of at least $250,000.

Vanguard's Sauter noted that the firm does not believe the new funds should be a core holding for investors. Rather, he recommended that shareholders use the new offerings as a modest portion of a balanced portfolio. Yet, he also hinted that Vanguard might be targeting advisors with the offerings.

"However, some institutional investors and financial intermediaries find sector funds to be useful in more sophisticated investment strategies, and with our unique multi-class share structure, we're providing them with the flexibility to choose the share class best suited to their needs," added Sauter.

Finally, the Vanguard is launching the Vanguard Large-Cap Index Fund, which will track the MSCI US Prime Market 750 index. That fund seemingly overlaps with Vanguard's existing S&P 500-based index fund. Why would Vanguard offer a competing fund to its core offering? One explanation is Vanguard's tussle in 2000 with Standard & Poor's over whether it needed to relicense the S&P indices for use in Vipers. Vanguard, though, says the MSCI are technically better indices than the S&P offering.

The real explanation may not matter too much. Either way, retail investors are about to get an introduction to MSCI and a whole lot more choice. 

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