1993 was a banner year for breakthroughs.
The World Wide Web opened to the general public, forever changing the way we gather and distribute information around the globe.
NASA put a pair of “glasses” on the Hubble Space Telescope, bringing its pictures into focus and showing us the wonders that exist beyond our atmosphere.
And ETFs (exchange-traded funds) debuted in the United States, making an indelible impression on how we invest. In the 25+ years since, ETFs have become an increasingly attractive way for investors of all types to harness the powerful combination of diversification, tax efficiency, and low costs that comes with indexing.
Changing the way people invest
ETFs were first introduced in Canada in 1990. When they launched in the U.S. 3 years later, they were used primarily by institutional investors who were largely interested in applying sophisticated trading strategies to their multimillion dollar accounts. By the end of 1993, U.S. ETF assets totaled nearly $465 million.*
But let’s go back a little further than that. In 1976, Vanguard took what was traditionally an institutional investment strategy—indexing—and released it to the masses so we could all benefit from low-cost, diversified investing. Why not do it again with ETFs?
Vanguard’s first ETF—now known as Vanguard Total Stock Market ETF (VTI)—entered the marketplace on May 24, 2001, attracting more than $1.2 billion in its first 7 months.* (How many of you remember them as the tongue-twisting Vanguard Index Participation Equity Receipts—or by their nickname, VIPERs?)
VTI now sits alongside dozens more Vanguard ETFs®, which have combined assets exceeding $850 billion,** making us one of the leading providers of ETFs in the U.S.
Last week I had the pleasure of attending an ETF.com award ceremony during which we received 3 “best” awards for 2018:***
- Best new U.S. equity ETF: Vanguard ESG U.S. Stock ETF (ESGV).
- Best new international/global fixed-income ETF: Vanguard Total World Bond ETF (BNDW).
- Best new active ETF: Vanguard U.S. Multifactor ETF (VFMF).
In all, we were nominated in 10 of 30 categories—more than ever in a single year. I left that room proud to represent a company that’s continuously aiming to improve investor outcomes.
The rapid expansion of ETFs
The popularity of ETFs has been nothing short of explosive. ETFs present a fresh alternative that combines the well-known benefits of indexing (diversification, tax efficiency, and lower costs) with real-time pricing (instead of having to wait until the end of the day) and the more manageable investment minimums of an individual stock.
It didn’t take long for ETF popularity to expand beyond big institutions and grab the attention of individual investors.
ETFs originally focused on the U.S. stock market. Then came the first international ETF (1996), followed by the first bond ETF (2002). In 2010, total ETF assets surpassed $1 trillion.† By year-end 2018, assets topped $3.4 trillion.† And the number of ETFs available for investment in the U.S. reached nearly 2,000, offering essentially complete coverage of U.S. and international stock and bond markets.
ETF growth: 1993–2018
Have ETFs caught up with mutual funds, though? Not quite. At the end of 2018, more than 8,000 mutual funds had combined total assets of $14.7 trillion.††
Are ETFs here to stay?
The surge toward ETFs doesn’t seem at all interested in slowing down. More than $311 billion flowed into ETFs industry-wide in 2018, with nearly $85 billion into Vanguard alone.** During that same time, nearly 250 new ETFs were launched.† And the menu is getting longer and more diverse, with new alternatives in the pipeline like ESG (environmental, social, and governance), factor-based, and more variations of actively managed ETFs.
At Vanguard, we’re always exploring new opportunities—but we stop short of experimenting with ETFs that reflect short-term fads or narrow market niches. Instead, we make thoughtful, intentional decisions and only introduce new ETFs that we believe will have enduring value for our investors.
With the increased expansion of the ETF market, there are more options—and more companies to choose from—than ever before. As with any industry, this heightened competition presents more opportunities for you to save money on expense ratios and commissions. Or, more simply put, while the number of ETFs (and the companies that offer them) is going up, costs are coming down.
For example, in addition to offering all Vanguard ETFs commission-free (an offer that’s been around for nearly a decade), last summer we expanded that to include nearly all ETFs, including around 1,800 ETFs from about 100 other companies.
(Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. Learn more about other conditions & costs that may apply.)
But that move raised questions. For example, outlets such as CNBC wondered if the move would encourage investors to abandon Vanguard’s long-term investment philosophy and start trading more frequently. So we dug into it and weren’t at all surprised to learn that the Vanguard investment community remains true to its buy-and-hold mentality. In fact, the data showed that 44% of our Vanguard ETF owners didn’t trade their ETFs at all in 2018, and 75% of them placed just 1–3 trades the entire year.†††
What all of this means for you
Wider acceptance of ETFs, with more alternatives and more firms offering them, can make it harder to sift through everything that’s out there. That’s why I was excited about our narrowed list of Vanguard Select ETFs™ and how it might help make the selection process feel less overwhelming.
Expansion of the industry has also attracted greater scrutiny and increased regulation, so it’s important to stick with a company you can trust. For example, while hundreds of new ETFs made their debut in 2018, 80 were completely liquidated as a result of low assets and/or low trading volume.† So it’s become increasingly important to be watchful for very narrowly focused “trial and error” ETFs and recognize the ones that are carefully crafted to have longer staying power.
In the end let’s not forget that, whether you prefer ETFs or mutual funds, Vanguard’s investment philosophy remains the same: Focus first on your investment timeline and finding an appropriate balance between stocks and bonds. Next, look for well-diversified options that could help reduce your investment risk. Then make your specific selections.
You just might find the best choice is an ETF.
**As of December 31, 2018.
***ETF.com Award winners were selected in a 3-step process designed to leverage the insights and opinions of leaders throughout the ETF industry. The awards process began with an open nomination period that ran from December 3, 2018, through January 3, 2019. Following the open nominations, the ETF.com Awards Nominating Committee—made up of senior leaders at ETF.com, Inside ETFs, and FactSet—voted to select up to 5 finalists in each category. Winners from these finalists were selected by a majority vote of the ETF.com Awards Selection Committee, a group of independent ETF experts. Committee members recused themselves from voting in any category in which they or their firms appeared as finalists. Ties were decided where possible with head-to-head runoff votes.
- You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
- All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
- Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.
- Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
- Factor funds are subject to investment style risk, which is the chance that returns from the types of stocks in which the fund invests will trail returns from the stock market. Factor funds are also subject to manager risk, which is the chance that poor security selection will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.