Vanguard Lowers the Cost of Investing… Again

Vanguard has recently launched nine new Exchange Traded Funds (ETF) that track S&P indices. The most watched appears to be the Vanguard S&P 500 ETF (VOO). VOO has an expense ratio of 6bps (.06%). In comparison, its two main competitors, State Street’s Spyder S&P 500 (SPY) and iShares S&P 500 (IVV), have expense ratios of 9bps (0.09%). While I would not expect investors to change S&P 500 index vehicles for 3bps, it will be interesting to see where the new flows go.

For long term investors, the Vanguard product would bring value. For investors looking to write options on the index, State Street’s Spyder has the most volume. iShares S&P 500 also offers option trading. However, we have found that the volume/liquidity is not sufficient at some prices in this volatile market. The Vanguard fund does not offer option trading.

iShares IVV reinvests its dividends into the S&P 500 until they are due to be paid out quarterly. State Street’s SPY holds the dividends in cash until payout. This creates a dividend drag in SPY. Although a very slight performance difference, the volatility in IVV is slightly higher. Vanguard’s prospectus was not clear, but appeared to indicate that dividends would be held in cash prior to investor payout.

State Street’s Spyder was the first ETF created in 1993 for institutions to park assets in the market until they found individual companies to invest in. Between 2000 and 2004, many new ETFs came to market, creating a new passive investing strategy that was cheaper and covering more asset classes than ever seen before. Active traders also like ETFs for the ease of access, liquidity and reduced company risk that indexing offers.

Vanguard is a powerhouse in the indexing world and has always been able to bring quality index vehicles to the market.  With the addition of ETFs to access S&P indices, we see additional value at great pricing. Price is not the only factor in choosing an ETF, but certainly is in the top five of considerations.

By Published On: September 16, 2010

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