Vanguard Trumps BlackRock, State Street To Record Highest ETF Inflows In Q1

Investors showed a shift in their preference for exchange-traded fund (ETF) providers over the first quarter, as Vanguard topped BlackRock (NYSE:BLK) and State Street (NYSE:STT) in terms of inflows for its ETF offerings. ^[1] Data compiled by Bloomberg estimates that U.S. ETFs added about $15 billion in net new money over the first three months of the year, with Vanguard bringing in $13.1 billion. BlackRock’s net inflows for the period were $4.5 billion while State Street saw investors pull out $18.3 billion from its U.S. ETFs.

Vanguard has the lowest average expense ratios for its ETFs compared to BlackRock and State Street, which has allowed the financial institution to garner a strong base among retail investors over recent years. In fact, with an asset-base of $345 billion at the end of Q1 2014, Vanguard is within striking distance of State Street’s $380 billion, which is the second highest figure. BlackRock retains a firm grip on the top spot, with U.S. ETF assets of $675 billion.

See our full analysis for State Street | BlackRock

The best indicator of the popularity of exchange traded funds (ETFs) and other exchange traded products (ETPs) is the fact that the industry grew to larger than $2 trillion in size last year from being a largely obscure investment option at the turn of the century. ^[2] The reason for this growth is that ETFs provide investors a cheap and convenient way to put their money into fixed income, equity, currency, commodities and other investment markets. And with the popularity really only skyrocketing in the past few years, the industry has the potential to continue to grow considerably in the future.

Both BlackRock and State Street have been vying for retail investors’ cash with a slew of low-cost ETFs, but it looks like Vanguard has a head start in this regard. Vanguard’s focus on retail investors is evident from its extremely low expense ratios – the firm’s ETFs have an average expense ratio of 0.14% compared to BlackRock’s 0.4% and State Street 0.32%. In other words, BlackRock pockets roughly three-times more fees compared to Vanguard for its ETF offerings. That would explain the strong growth in assets for the smaller asset manager over the last few quarters, and in Q1 2014 in particular, as retail investors have a strong incentive to pull out their cash from a more expensive ETF to a cheaper ETF with comparable performance.

State Street took a hit here, as it lost more money than any other asset manager over the quarter. Its extremely popular SPDR S&P 500 ETF – the world’s largest ETF – saw a reversal of fortunes, as the $21.1 billion in inflows for Q4 2013 were followed by $19 billion in outflows for Q1 2014. While this does not bode well for State Street’s asset management business, the overall impact on the custody bank’s total business model is negligible – something we pointed out last month in our article Should State Street Worry About ETF Outflows?

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1. Vanguard Beats BlackRock Winning Most ETF Money This Year, Bloomberg, Apr 1 2014 [↩]
2. ETFGI Press Release, Apr 8 2013 [↩]