Vanguard Group, Malvern, estimates it brought in a net $138 billion into its mutual funds, ETFs and money market funds for 2013, "just shy of our record 2012 cash flow of $141 billion," spokesman John Woerth tells me.
Add it all up, and Vanguard, with more than $2 trillion in clients' funds, has boosted its market share in the funds industry to 18%, more than double where it was in the early 1990s and far ahead of former industry leaders Fidelity (of Boston) and California-based American Funds, "both of which have lost market share over the past five years," writes fund-watcher Morningstar's Michael Rawson here. Vanguard has also been growing more rapidly than its main ETF rival, iShares.
Rawson credits Vanguard's growth to three familiar strategies:
- Index funds, disparaged by the industry when then-Vanguard boss John Bogle expanded his use of market indices in the 1970s and 80s, became popular with bargain-hunting investors as stock market profits stagnated in the 2000s and "active" managers failed to justify their costs. According to Morningstar, Vanguard has now built "a dominant 44% market share of all passively managed assets, and more than twice the assets of the second-largest manager of passive fund assets, iShares."
- Low fees: "Vanguard's asset-weighted average expense ratio of just 0.15% [15 cents a year per $100 invested] is well below the 0.68% asset-weighted expense ratio of the industry overall and lower than that of Fidelity (0.67%), American Funds (0.74%), and iShares (0.33%)." It's easier to charge less when the job of picking stocks is outsourced to index makers. Vanguard has also gained the advantage of dominating size, which helps it cut costs..
- "The nature of fund distribution is changing." Cuts to corporate guaranteed pension plans have left more workers dependent on 401-k and 403-b plans where the risk is on investors, whose advisors are guiding them toward cheap Vanguard-style funds.
Morningstar warns that Vanguard's "hybrid" structure, in which it has both traditional mutual funds and ETFs in linked portfolios, sometimes forces unwanted capital gains on the ETF owners. Though the risk for most investors, Morningstar adds, is "remote." Vanguard has switched indexes and managers on a number of funds in ways that avoided capital gains taxes, Ransom added.