Is Vanguard Europe’s ETF dormant powerhouse?

Vanguard has yet to rank among the top three ETF issuers in Europe, despite predictions that it will surpass BlackRock as the biggest issuer of ETFs over the next ten years. Can it advance, and if so, what will fuel this change? 

Vanguard has mostly been content to forego the title of first mover when it comes to ETFs, in contrast to its founding role in index funds under founder and chairman Jack Bogle. 

In his Little Book of Common Sense Investing, Bogle claimed that Nathan Most, the inventor of the first ETF, had approached him with a proposal to list the first ETF in the United States. However, Bogle had declined the proposal, a move that had paved the way for SPDR S&P 500 ETF Trust (SPY), the flagship product of State Street Global Advisors. 

Using our S&P 500 index fund as the trading vehicle, Bogle recalled that the late Nathan Most, a good man, initially wanted to collaborate with Vanguard. I turned down his offer because trading is a losing proposition for investors while being profitable for brokers. But we grew apart as friends. 

Vanguard declined the opportunity because of the behavioral inclinations they encourage, which are at odds with the company’s motto of disciplined, long-term investing, a spokeswoman for the company told recently.

Having compared ETFs to a “wolf in sheep’s clothing,” Bogle concluded by saying: “There is nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you do not trade them. 

In a previously patented manner, the company will introduce the now $289 billion Vanguard Total Stock Market ETF (VTI) as a share class of its worldwide equities mutual fund eight years after the advent of SPY. 

Accession of European ETFs

Vanguard would not enter European ETFs until 2012, and it would take another 11 years for its UCITS ETF lineup to surpass $100 billion in assets under management (AUM). 

Vanguard’s head of product specialization, Mark Fitzgerald, responded to a question regarding the company’s relatively late introduction into the market by saying that the company’s expansion was the result of organic growth. 

“We don’t acquire an incumbent, as is the conventional business plan for global asset managers, to gain market share. It simply takes time; you start with the fundamental exposures in mutual funds—our position in Europe and our global equities fund are both 25 years old—then you look at a combination of building blocks before moving on to ETFs,” according to Fitzgerald.

Products need seed to debut with a small tracking inaccuracy, too. As a result, our shareholders, who serve as our clients because we are not a traditional asset manager, must provide a particular amount of AUM as seed money. 

With just 34 products, Vanguard is now Europe’s fourth-largest ETF issuer by AUM. More than 1,000 ETFs in Europe alone are available if you combine the product portfolios of the three issuers mentioned above—BlackRock, Amundi, and DWS. 

According to Fitzgerald, the core of your portfolio can be built with a smaller number of core, diversified goods that are reasonably priced.  

The other companies can then make the more specialized goods, which may be less plentiful and almost certainly unprofitable. 

Currently, the company’s European ETF selection is only a minor portion of their overall 181 ETFs and is less than half the size of the 75-strong US suite. Nevertheless, even this amount is insignificant when compared to the 1,051 in the iShares, 265 SPDR, 410 Invesco, 390 Amundi, and 300 Xtrackers ranges, respectively. 

Vanguard’s Robyn Laidlaw, head of European distribution, stated: “We are focused on the end investor and the intermediary that serves them – we offer products that serve as either portfolio construction tools or complete portfolio solutions. We don’t want to release products to amass assets or to capitalize on every trend. 

“The evolution of the business in Europe has been one of serving institutional investors initially, and now it is more focused on servicing intermediaries, from banks to insurance companies to other asset managers, all the way down to final retail customers in Germany and the UK.” 

ETF market

European growth vectors from Vanguard 

In response to a question on the factors that might propel Vanguard into the top three in Europe, Laidlaw stated: “Direct to retail or retail advised opportunity in Europe is crucial because this is a group that has not really been involved with ETFs to a significant degree thus far.” 

While index-tracking funds make up around half of all advised and non-advised retail portfolio assets in the US, this percentage was less than 10% in the UK eleven years ago.

However, according to Laidlaw’s estimate, many nations in mainland Europe need to catch up, which is that this is approaching 30%. 

European investors should enjoy the advantages of retail indexing. According to her, a significant portion of that has to do with how financial advice is delivered in these areas. 

By functioning as financial planners rather than product marketers, advisers now operate in a fee-based advice market thanks to the UK’s Retail Distribution Review (RDR). Since index-based products are inexpensive, this aligns the interests of clients and advisers and makes them a more likely choice. 

Contrarily, the environment is still based on retrocession in Europe. As a result, there is still room for significant growth in retail ETF membership, according to Laidlaw.

ETFs will have the same chance on digital trading platforms under the retail investment strategy review, even if retrocessions will only be prohibited through execution rather than outright. 

In her remarks on the digital possibilities, she claimed that ETF saving plans in Germany had been a crucial “green shoot” in the tale of distributing to retail and that Vanguard had also wrapped its well-known LifeStrategy fund of funds range in ETFs to provide exposure to European retail clients in 2020. 

When asked if the company would think about following BlackRock’s lead and partnering with neo-brokers Scalable Capital and Bux, Laidlaw responded, “We do not have any details of partnerships, but we speak to a lot of people in the UK, Germany, Italy, and Switzerland who are really interested in these types of solutions. 

We would be extremely interested in looking into it further if there is a way we could collaborate to provide these kinds of solutions to clients in Europe through a partnership model.

Regarding products, Vanguard has long been known to have concentrated mostly on inexpensive, index-tracking core building blocks in Europe. According to Fitzgerald, active ETFs may be of interest if the company believes the products will enhance its European clients’ product offerings. 

“Active would undoubtedly be a topic of interest for us. We have a long-term, conservative, and cautious global product plan, but we also consider other factors, such as the state of the industry, what our rivals are doing, and where we might go in the future. 

We are the third-largest active fixed-income manager worldwide and the biggest purchaser of sub-advised active equity management. Although we will need to determine if it has any use, active will still be an option in ETFs. 

Even though Vanguard entered the UCITS ETF market a little more than ten years ago, it has yet to reach the grand stature of its US ETF platform. However, there is still plenty of room for growth in terms of new products and clients, so it may be a matter of waiting.