Apparently Vanguard has been a little too successful in attracting smart, fee-conscious, long-term investors.
Its relatively new exchange-traded (ETF) fund lineup has achieved remarkable success, hitting $50 billion in assets - $8.5 billion came in so far in 2008 alone. So why is Vanguard messing with such a good thing, using gimmicks the firm wouldn't use with its traditional funds?
This article off the Dow Jones Newswire offers possible explanations including:
The effect of Vanguard's share split will be to allow investors to trade the funds in smaller amounts. For now, each of the three ETFs' share price is more than $100. Shares of Vanguard Total Stock Market ETF are about $138, meaning that's the de facto minimum investment for any investor who wants to buy the fund, and the smallest increment in which existing investors can buy and sell. After the split the new number will should closer to $69."
But investors with less than $100 should probably not be investing in ETFs at all. Even at a cheap discount broker an ETF investor is going to pay $7 in commissions - which is a big chunk of a sub-$100 ETF investment. That kind of cost runs counter to one of exchange traded funds' main selling points - their cheapness of ownership.
The only legitimate reason we can think of for Vanguard's split of ETF shares is to lower the bid/ask spread. The bid price is the highest offer to buy and what a seller would get selling an ETF (or stock). The ask price is the lowest price sellers are asking and the price at which an investor would buy (assuming you are trading a relatively small number of shares). This spread represents costs ETF investors would avoid by buying ordinary index funds which trade at NAV (net asset value) at the end of the day. For thinly-traded ETFs, such spreads can be 10 cents per share or more. Even for longer-term investors this hurts performance, as it represents .25% per share on a $40 ETF - much more than the expense savings between an ETF and an ordinary index fund.
Vanguard 's ETFs appeal primarily to longer-term investors who like the lower fees. Vanguard's largest ETF, Vanguard Total Stock Market ETF (VTI), has $10.4 Billion in assets, and trades about a half million shares a day. PowerShares QQQQ (QQQQ), one of the most popular ETFs with active traders, is about twice as large, but trades well over 100 million shares a day - more than 200x as much as Vanguard Total Stock Market. Because of this massive volume, spreads on QQQQs are often just a penny a share.
Vanguard tells us that they expect the trade volume of these split ETFs to double and the bid ask/spread to fall with the higher volume, but they do not expect the bid ask spread to fall by 50%. When asked how this is supposed to save fund investors money when they would be buying twice as many shares post-split as they would have pre-split for the same investment amount, I was told it was because the spread would be narrower. Go figure.
The real reason for the split is perhaps the same one publicly traded companies use when they split their shares - make the stock seem to have more upside and therefore more attractive to investors. Vanguard admits the psychological effect of the lower price was a factor. SPDR S&P 500 ETF (SPY) - the largest ETF with around $70 billion in assets - trades at around $138. We'll see if investors think VTI is more attractive than higher-priced ETFs at the new lower price after the June 17th split. If they do, then the volume of these funds will more than just double, and dramatically increased volume could result in far lower bid ask spreads.
But what if this leads other ETF providers to do 10 for 1 splits? We don't put it past the increasingly strange ETF business.
Vanguard Splits ETFs For Mysterious Reasons
Apparently Vanguard has been a little too successful in attracting smart, fee-conscious, long-term investors.
Its relatively new exchange-traded (ETF) fund lineup has achieved remarkable success, hitting $50 billion in assets - $8.5 billion came in so far in 2008 alone. So why is Vanguard messing with such a good thing, using gimmicks the firm wouldn't use with its traditional funds?
Vanguard announced today a two-for-one split of shares of Vanguard Total Stock Market ETF (VTI), Vanguard Emerging Markets ETF (VWO), and Vanguard Extended Market ETF (VXF)."
This article off the Dow Jones Newswire offers possible explanations including:
The effect of Vanguard's share split will be to allow investors to trade the funds in smaller amounts. For now, each of the three ETFs' share price is more than $100. Shares of Vanguard Total Stock Market ETF are about $138, meaning that's the de facto minimum investment for any investor who wants to buy the fund, and the smallest increment in which existing investors can buy and sell. After the split the new number will should closer to $69."
But investors with less than $100 should probably not be investing in ETFs at all. Even at a cheap discount broker an ETF investor is going to pay $7 in commissions - which is a big chunk of a sub-$100 ETF investment. That kind of cost runs counter to one of exchange traded funds' main selling points - their cheapness of ownership.
The only legitimate reason we can think of for Vanguard's split of ETF shares is to lower the bid/ask spread. The bid price is the highest offer to buy and what a seller would get selling an ETF (or stock). The ask price is the lowest price sellers are asking and the price at which an investor would buy (assuming you are trading a relatively small number of shares). This spread represents costs ETF investors would avoid by buying ordinary index funds which trade at NAV (net asset value) at the end of the day. For thinly-traded ETFs, such spreads can be 10 cents per share or more. Even for longer-term investors this hurts performance, as it represents .25% per share on a $40 ETF - much more than the expense savings between an ETF and an ordinary index fund.
Vanguard 's ETFs appeal primarily to longer-term investors who like the lower fees. Vanguard's largest ETF, Vanguard Total Stock Market ETF (VTI), has $10.4 Billion in assets, and trades about a half million shares a day. PowerShares QQQQ (QQQQ), one of the most popular ETFs with active traders, is about twice as large, but trades well over 100 million shares a day - more than 200x as much as Vanguard Total Stock Market. Because of this massive volume, spreads on QQQQs are often just a penny a share.
Vanguard tells us that they expect the trade volume of these split ETFs to double and the bid ask/spread to fall with the higher volume, but they do not expect the bid ask spread to fall by 50%. When asked how this is supposed to save fund investors money when they would be buying twice as many shares post-split as they would have pre-split for the same investment amount, I was told it was because the spread would be narrower. Go figure.
The real reason for the split is perhaps the same one publicly traded companies use when they split their shares - make the stock seem to have more upside and therefore more attractive to investors. Vanguard admits the psychological effect of the lower price was a factor. SPDR S&P 500 ETF (SPY) - the largest ETF with around $70 billion in assets - trades at around $138. We'll see if investors think VTI is more attractive than higher-priced ETFs at the new lower price after the June 17th split. If they do, then the volume of these funds will more than just double, and dramatically increased volume could result in far lower bid ask spreads.
But what if this leads other ETF providers to do 10 for 1 splits? We don't put it past the increasingly strange ETF business.
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