For the first time since 2007, it looks like there will be a new number one fund company in terms of where investors send their money.
Looking ahead to 2022, the Vanguard fund is the ultimate destination for investors’ money for 15 consecutive years. While there is still a month left to close out the year, iShares BlackRock seems poised to wrest the crown from Vanguard.
As of the end of November, iShares’ line of exchange-traded funds had raised $152.4 billion compared to Vanguard’s total inflows of $80.3 billion.
In a bit of irony for the company that popularized index funds, it was the withdrawal from Vanguard’s actively managed fund that seemed to have dethroned the flow champion. At the same time, iShares, where the lineup is entirely ETFs, has caught a lot of money moving into bond ETFs.
Of course, Vanguard is not staggered in any way. Its index tracking fund received more money than iShares in 2022, and compared to other fund families that have severe outflows, it’s doing pretty well.
But the change in leadership suggests a shift in investor preferences and the strength of the iShares lineup. Vanguard has also faced criticism for its customer support and company-wide commitment to ESG investing, which is popular with young investors, said Morningstar’s managing research director, Alec Lucas.
Vanguard has become the domiant force in the fund industry, receiving the most money from any fund family over the past 15 years, and within a few years saw inflows outperform all of its competitors combined. Known for its low-cost index funds, investors have invested more than $2 trillion in Vanguard mutual funds and exchange-traded funds since 2013.
Vanguard’s direct-to-investor, low-cost and index-oriented approach to investing has been the reason why vanguard is so dominant, Lucas said.
In general, investors still prefer low-cost funds that are passively managed. Although Vanguard is the original proponent of this investment, iShares’ broad lineup, especially among fixed income investments, has made it even more competitive with Vanguard.
In most areas, Vanguard still reigns. Vanguard’s passive business has amassed more than iShares in 2022, and the Vanguard Total Bond Market ETF BND outperformed the iShares Core US Aggregate Bond ETF AGG for the largest bond ETF in August. Last year, more than 93% of the new money Vanguard collected was added to the indexed product list, writes Adam Sabban, senior manager research analyst at Morningstar.
“The leadership that Vanguard and iShares have shown is a testament to the dominance of exchange-traded funds,” Lucas said.
Vanguard Active Departure
It was the outflow of actively managed funds that affected the flow of Vanguard. Primarily passive fund managers, active funds account for about 20% of Vanguard’s mutual funds and exchange-traded fund assets, while iShares offers almost passively managed funds exclusively. (BlackRock’s actively managed open funds are managed separately.) Outflows from Vanguard’s active funds totaled $91.4 billion through Nov. 30.
Vanguard isn’t the only one seeing investors pull out of their active funds. After a brief resurgence in 2021, 2022 has been one of the worst years for active managers in terms of flow. Actively managed funds are on track for one of their worst years, as $805 billion has come out this year.
In addition to preferring passive managed funds, the widespread exodus of taxable bond funds in 2022 has hurt Vanguard. Taxable bond funds have become a constant destination for dollar investors. Over the past three years, the company’s taxable bond fund raised $452.3 billion.
But this year, as bond funds post one of their worst years on record, investors have withdrawn $29.9 billion from a taxable bond fund actively managed by Vanguard. Passively managed bond funds still experienced inflows of $26.6 billion.
The outflow of the city’s allocation funds and bonds is huge. The $66.9 billion Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) has recorded outflows of $15 billion.
While bond fund outflows plagued Vanguard, bond ETFs have become a force for iShares. “IShares has carved out profits in the fixed income space,” said Ryan Jackson, research analyst at Morningstar.
“The most obvious win for IShares came in Treasury ETFs that made safe-haven investments popular at the beginning of the year,” he said. IShares 20+ Year Treasury Bond ETF (TLT), iShares 1-3 Year Treasury Bond ETF (SHY) and iShares US Treasury Bond ETF (GOVT) accounted for nearly $33 billion entries alone.