Vanguard to Get the ETF It Always Wanted, and Much More

The granddaddy of all index mutual funds, the  Vanguard 500 (VFINX), will finally get an ETF share class; existing rival ETFs and those tracking other S&P and Russell domestic equity benchmarks also will get some serious price competition.

Nearly a decade after losing a court case over whether Vanguard could launch an ETF version of its oldest and largest index fund, the world's biggest mutual fund family said on Thursday that it hopes to launch 19 new mutual funds and 20 new ETFs, including one tracking the S&P 500. Vanguard filed registration statements with the Securities and Exchange Commission for the funds and ETFs Thursday and expects to launch them, pending approval, this summer.

The filing includes ETFs and institutional funds tracking eight S&P and seven Russell domestic equity style indexes. It also includes three municipal bond ETFs and mutual funds tracking S&P indexes, though the traditional funds would only be available as Admiral Shares that require a $100,000 minimum investment. An international real estate ETF and fund tracking an S&P index round out the proposal. All of the new ETFs would be among the cheapest options in their respective categories.

Fund Benchmark Est. ETF Expense Est. Inst Expense Vanguard 500 ETF/Vanguard 500* S&P 500 Index 0.06 0.05 Vanguard S&P 500 Val Idx S&P 500 Value 0.15 0.08 Vanguard S&P 500 Gr Idx S&P 500 Growth 0.15 0.08 Vanguard S&P Mid-Cap 400 Idx S&P Mid-Cap 400 0.15 0.08 Vanguard S&P Mid-Cap 400 Val Idx S&P Mid-Cap 400 Value 0.20 0.08 Vanguard S&P Mid-Cap 400 Gr Idx S&P Mid-Cap 400 Growth 0.20 0.08 Vanguard S&P Sm-Cap 600 Idx S&P Small-Cap 600 0.15 0.08 Vanguard S&P Sm-Cap 600 Val Idx S&P Small-Cap 600 Value 0.20 0.08 Vanguard S&P Sm-Cap 600 Gr Idx S&P Small-Cap 600 Growth 0.20 0.08 Vanguard Russell 1000 Idx Russell 1000 0.12 0.08 Vanguard Russell 1000 Val Idx Russell 1000 Value 0.15 0.08 Vanguard Russell 1000 Gr Idx Russell 1000 Growth 0.15 0.08 Vanguard Russell 2000 Idx Russell 2000 0.15 0.08 Vanguard Russell 2000 Val Idx Russell 2000 Value 0.20 0.08 Vanguard Russell 2000 Gr Idx Russell 2000 Growth 0.20 0.08 Vanguard Russell 3000 Idx Russell 3000 0.20 0.08 Vanguard Sh-Term Muni Idx* S&P Nat'l AMT-Free Muni 0.12   Vanguard Int-Term Muni Bd Idx* S&P Nat'l AMT-Free Muni 0.12   Vanguard Long-Term Muni Idx* S&P Nat'l AMT-Free Muni 0.12   Vanguard Gbl ex-U.S. Real Est Idx* S&P Global ex-U.S. Prop 0.35 0.30
Source: Vanguard | * Other Share Classes Available.

The Vanguard S&P 500 ETF would be the biggest launch of the bunch, though. It would be a new share class of the $91 billion in assets, 34-year-old Vanguard 500 and, at 0.06%, would offer the lowest expense ratio among the existing S&P 500 ETFs. The  iShares S&P 500 Index (IVV) and  SPDR S&P 500 (SPY) both currently charge 0.09% expense ratios.

Vanguard had meant to launch ETF shares for the 500 when it first rolled out its ETF lineup in 2001, but Standard & Poor's contended that ETFs weren't part of Vanguard's original licensing agreement and successfully defended that position in court. At the time, Standard & Poor's offered exclusive ETF rights on the S&P 500 to Barclays Global Investors, the advisor to the iShares ETF family that is now part of  BlackRock (BLK). That exclusivity agreement has since expired, offering Vanguard a window to renegotiate its license.

Though cheaper, it's not clear the Vanguard S&P 500 ETF will incite a stampede out of its iShares and SPDR rivals. The latter ETFs have been on the market for 10 and 17 years, respectively, have considerable trading volume, and narrow bid-ask spreads, factors that are important to many retail and professional ETF investors.

It's surprising that Vanguard would launch new S&P and Russell style ETFs and funds. The family used to use S&P benchmarks for its style index funds, but moved to MSCI benchmarks in 2003. At the time Vanguard contended MSCI's indexes were based on a sounder index construction methodology that would improve tracking error, reduce transaction costs, and offer investors a truer representation of the equity universes they sought to mimic.

Vanguard still plans to stick with the MSCI indexes for its oldest equity style funds and ETFs. Indeed, demand from institutions and advisors seems to be the biggest reason the family is offering S&P and Russell equity style ETFs and funds at all. "We recognize that institutional investors and financial advisors may have a preference for certain benchmarks," said Vanguard Chairman and CEO Bill McNabb in a statement. The institutional share classes of the S&P and Russell style funds, which will require a $5 million minimum, will be out of the reach of most retail investors. Vanguard decided not to offer more accessible retail share classes for the S&P and Russell funds because they still would have been more expensive than the existing funds tracking MSCI indexes.

The slew of launches should banish any lingering doubts about the intentions of Vanguard--a relative latecomer to ETFs--to compete fiercely in this arena. The proposal would increase Vanguard's $100 billion ETF lineup from 46 to 66. Vanguard, whose mutual funds have been among the industry's best sellers in recent years, also has been attracting the most new ETF dollars recently. Its $33 billion in inflows for the trailing year ending May 31 was tops among ETF providers.