Vanguard struggles to replicate US ETF success in Europe

Vanguard Europe has €47.5bn AUM across 26 ETFs

George Geddes

a person standing on a map

Vanguard is yet to replicate the roaring success the asset manager has had in the US this side of the pond amid a concentrated ETF range, a lack of ESG ETFs and a smaller retail market in Europe.

Alarm bells could be ringing at the US giant after its European ETF range suffered its second consecutive quarter of outflows in Q3, according to data from Morningstar.

The flows are in stark contrast to the US where Vanguard is topping the charts this year having captured $133bn in new assets, as at the end of Q3. This is despite the fact the world’s second largest asset manager has just 81 ETFs on offer in the US compared to the 376 run by BlackRock and 140 by State Street Global Advisors.

One key issue the ETF issuer faces is the concentration of assets across its European ETF range. Vanguard has €47.5bn assets under management in Europe across just 26 ETFs, 17 in equity and 9 in fixed income.

As Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, highlighted, 44% of Vanguard’s assets are in a single ETF, the Vanguard S&P 500 UCITS ETF (VUSA) and this has seen €1.3bn outflows so far this year.

Psarofagis noted how larger European ETF issuers are less dependent on their largest strategies as assets are typically more spread out across ETFs.

“Europe's five largest ETP issuers are well-diversified, with an average of 6% of total assets in their largest products,” he continued. “Smaller issuers are more top-heavy, averaging 30% of assets in their biggest products”

With 14 percentage points more dependency on its largest product, Vanguard is significantly less diversified than even the average smaller issuer in Europe.

The physically-backed VUSA is also looking unfavourably positioned in terms of its structure as synthetic US equity ETFs have an advantage as they do not suffer from withholding tax on dividends.

Jose Garcia-Zarate, associate director, passive strategies, manager research, Europe at Morningstar, told ETF Stream: “Due to the tax advantages, we are seeing a number of clients migrating from physical products into synthetic for US equity exposures over the past few years.”

Due to the minimal tracking error and improved performance, Garcia-Zarate mentioned how investors can see between 25 and 30 basis points in extra returns if they choose a synthetic product for this exposure.

Earlier this month, ETF Stream revealed BlackRock, the “flag bearer” for physically backed, according to Garcia-Zarate, launched a synthetic version of its S&P 500 UCITS ETF in its bid to capture this transition.

European issuers criticise BlackRock for synthetic ETF launch

For the ETFs they do have available, Vanguard hopes to offer investors the core building blocks for their portfolios using its ETF range. In 2020, the firm has only launched one new ETF along with five new share classes for existing funds.

A spokesperson at Vanguard told ETF Stream: “We offer a very focused range of 26 equity and fixed income UCITS ETFs, most of which are designed to be used as core building blocks in portfolios.

“We will continue to develop our range in accordance with investors’ needs.”

The firm added it takes a long-term approach to its product development and said it has not had its 2020 plans impacted due to coronavirus.

A significant volume of investors Vanguard caters to is the retail audience but this is a considerably smaller portion of the market compared to institutional.

Psarofagis, however, argued assets from retail investors could grow this year but Vanguard is not well positioned to capture any of this growth.

“I do see retail investments in ETFs growing a bit this year but it has been in exposures like thematics and commodity ETPs, for example, which are areas that vanguard does not play in,” he said.

Environmental, social and governance (ESG) strategies are also growing in popularity but is another area Vanguard could potentially miss out as it stands.

While many ETF issuers are frequently developing and expanding their ESG offerings, Vanguard does not have any ESG or sustainable products on offer.

In Q3 2020, ESG ETFs accounted for 30% of all inflows in the market which is a significant figure, according to Garcia-Zarate.

ETF issuers not focusing on ESG are set to lose out in a big way

“We are seeing a lot of the flows this year going into ESG products which Vanguard does not offer exposure to and will not be benefitting from that either,” he said.

As markets rapidly progress to synthetic US equity ETFs, ESG and less concentrated product offering, Vanguard has definitely felt the consequences. While the firm’s ETF business might be continuing to dominate the market in the US, the similar strategy is not seeing quite the same results on this side of the Atlantic.