Demand for low-cost funds lifts Vanguard to $4.7 trillion

The firm extends its winning streak off the continuing shift toward passive funds

Demand for low-cost funds lifts Vanguard to $4.7 trillion
Netting nearly US$300 billion in investor inflows over the first nine months of the year, Vanguard Group has reached US$4.7 trillion in assets under management.

The torrent of new assets has been fed largely by the industry’s unprecedented appetite for index funds. Of the US$291.7 billion in net inflows logged through September this year, some US$263 billion was put in index-tracking funds, reported the Wall Street Journal. The firm is on track to topple its 2016 whole-year record of US$323 billion in inflows.

“Last year [brought firmwide flows] that I never thought we’d see again,” Vanguard CEO F. William McNabb III told the Journal.

The firm’s winning streak reflects investors’ unprecedented appetite for low-cost, index-based products. According to data from Morningstar, US mutual funds and ETFs have attracted US$516 billion so far this year, the vast majority of which has gone to index funds. Proponents of passive investing say that active stock-picking mutual funds don’t do well enough to justify large fees.

Vanguard founder John C. Bogle came to that realization back in 1975; a few years after that, the firm started the first index fund for retail investors. Today, the firm continues to charge rock-bottom fees, and it has long stood out for its refusal to pay for distribution of its funds.

That strategy has been its strength in the US as a new set of retirement-advice rules continues to make waves throughout the industry. Although the regulations from the US Labor Department face an uncertain future, advisors are getting ahead by adopting fee-only advice models and swapping out the active funds in their retiree clients’ portfolios with low-cost index-trackers.

As more investors convert to passive investment, active funds are feeling the pinch. Mutual-fund companies have adopted various responses, from fee cuts and product-lineup overhauls to mergers. And although data from research firm HFR showed inflows for hedge funds in the most recent quarter, investors pulled money out of the industry over the six straight quarters previous to that.

Experts note that inflows into passive funds are happening against a backdrop of general market optimism; in case of a reversal in sentiment, things could turn out very differently.

“I don’t think that there’s much that changes these flows until we have a negative market,” said Daniel Wiener, editor of the Independent Adviser for Vanguard Investors, a newsletter that follows Vanguard funds. “I can’t tell you when that happens, but when it does there will be a lot of very surprised investors.”

That may be true, but for the moment, ETF providers are enjoying the ride. “[Y]ou’re still seeing the highest level of flows into riskier assets than at any time in my career,” McNabb said.

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