ETF Due Diligence Series: A View of Vanguard

Morningstar associate director of ETF research Jose Garcia-Zarate takes an in-depth look at some of the biggest ETF providers in the market. This week his views on Vanguard

Jose Garcia Zarate 26 June, 2019 | 9:09AM
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The growing popularity of exchange-traded funds means that investors now have tens of thousands of trackers to choose from. But where to start? Considerations including assets under management, tracking error, charges and the track record of the fund group. But with hundreds of ETF all promising to track the same market, picking a fund can seem an impossible task.

In a new series, Morningstar associate director of ETF research Jose Garcia Zarate takes an in-depth look at some of the biggest ETF providers in the market. This week we investigate Vanguard. 

While Vanguard has been active in the US ETF market since 2001, it launched its ETF business in Europe in 2012. A late entrant to the European ETF marketplace, backed by its strong reputation in the US, Vanguard has quickly established itself as a force to be reckoned with. This is despite offering a significantly narrower range of products than its direct competitors. It has now grown to become the sixth-largest ETF provider in Europe, with a market share of 4.6% as of May 2019.

We hold Vanguard in high regard. The source of the firm's competitive advantage and the foundation of its investor-focused culture is its distinctive mutual ownership structure. Fund shareholders own Vanguard through its funds, which compels the firm to put fund shareholders’ interests first.

It specialises in low-cost straightforward ETFs that are well-suited as core building blocks in investors' portfolios. However, for all its reputation for low-fee investing, in Europe Vanguard rarely offers the lowest-cost ETF for a given exposure, but rather "one of the lowest".

Vanguard's 25-strong ETF offering is exclusively physical and gives investors access to broad equity and fixed-income markets. This also includes four actively managed equity ETFs. For equity ETFs, portfolio managers use two techniques: full replication and optimisation. For fixed-income ETFs, the default replication methodology is stratified sampling.

By focusing on plain-vanilla products, Vanguard's ETF offering may not be sufficient to cover all investor needs. But the benefits to investors of bringing additional me-too products (Euro Stoxx 50 and DAX ETFs) at no lower fees into an already saturated market are questionable.

We have confidence in the well-resourced indexing team. The fund management process is efficient and tightly controlled for operational risk.

Dragging its Feet

Compared to other large asset managers, Vanguard has dragged its feet with respect to investment stewardship. It has stepped up its efforts of late, growing its stewardship team from 10 professionals in 2015 to 33 in 2018.

It’s a move in the right direction but given its scale, we expect Vanguard to increase its capabilities further, especially outside of its home market, and play a more influential role in improving ESG standards across the board. There is also significant room for improvement when it comes to disclosure of engagement. Disclosure of rationales behind controversial votes would be welcome too.

The bulk of the stewardship team personnel are stationed in the US, although the establishment of a London-based European investment stewardship team shows a commitment to expanding non-US engagement activities.

You can find the full report in "A Guided Tour of the European ETF Marketplace" here.

Read our analysis of iShares here and about Lyxor here

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Jose Garcia Zarate

Jose Garcia Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe

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