On February 3, 2025, Vanguard cut fees on 168 share classes across 87 funds, including for 53 ETF share classes. Vanguard is the only U.S. issuer that has ETFs as a share class of its mutual funds.
As one of the world’s largest asset managers, Vanguard’s move will pass on significant savings to investors while also putting significant margin pressure on ETF competitors. However, the implications for the ETF industry will vary by ETF category. Table 1 summarizes the broad categories in which Vanguard cut fees as well as the current leaders in those categories based on net assets and lowest expense ratios.
In some ETF categories, Vanguard is already the lowest-cost provider and has ETFs with the highest net assets. In these areas, fee cuts will be an opportunity to pass on fee reductions to investors while also using those low fees to further drive its asset-gathering momentum. In other areas, Vanguard does not have the largest ETFs and could use the fee cuts as a way of improving its market share.
Categories With Opportunities for Vanguard to Play Catch-up
An area where Vanguard could use fee cuts to gain market share is in U.S. focused sector ETFs, where the firm cut fees across 10 funds. Vanguard is not the lowest cost provider in this category even after these latest reductions. Fidelity’s U.S. sector ETFs are priced at 0.08%, one basis point lower than Vanguard’s new fee of 0.09% on its sector ETFs. However, Vanguard’s lower fee now puts it on par with the sector ETF fees of State Street, the runaway leader by assets in the U.S. sector category.
Vanguard’s sector ETFs, while large, are small relative to those of State Street. As an example, the Vanguard Financial ETF (VFH) had $12.4 billion in assets as of January 31, 2025, compared to $53.8 billion in the Financial Select Sector SPDR Fund (XLF). Sector ETFs represent a significant opportunity for Vanguard to use its new fee structure to compete for additional market share.
Another area where Vanguard has an opportunity to gain some market share is in U.S equity ETFs indexed to Russell core indices. BlackRock is the clear leader in this space, despite Vanguard already being the lowest-cost provider. For example, as of January 31, 2025, the iShares Russell 1000 ETF (IWB) had $40.4 billion in assets compared to $5.6 billion in the Vanguard Russell 1000 (VONE) despite the latter being 0.07% cheaper. The expense ratio reset may be an opportunity to reintroduce these funds to investors who want products linked to Russell’s indices.
U.S. equity ETFs linked to S&P indices is a larger category than those linked to Russell indices. Vanguard already leads in the large cap segment with its Vanguard S&P 500 ETF (VOO), which is about to surpass the SPDR S&P 500 ETF Trust (SPY) as the world’s largest ETF. However, in the S&P index linked mid and small cap equities space, it trails its two competitors, BlackRock and State Street. For example, the Vanguard S&P Mid-Cap 400 ETF (IVOO) had only $2.5 billion in assets as of January 31, 2025, compared to $99.5 billion in the iShares Core S&P Mid-Cap ETF (IJH) and $24.5 billion in the SPDR S&P MidCap 400 ETF Trust (MDY). Closing this large asset gap may be difficult for Vanguard, particularly since even after the IVOO fee reduction from 0.10% to 0.07%, it will still not be the lowest cost option. The SPDR Portfolio S&P 400 Mid Cap ETF (SPMD) is a much cheaper option at 0.03% linked to the identical index.
In the fixed income area, Vanguard or BlackRock are close competitors, with either one tending to have the largest ETF depending on the specific sub-category. Vanguard will be hoping to use the fee cuts to make inroads in those fixed income areas where it still trails, like emerging market government bond ETFs. In this sub-category, the Vanguard Emerging Markets Government Bond ETF (VWOB) trailed the larger iShares JP Morgan USD Emerging Markets Bond ETF (EMB) by over $9 billion as of January 31, 2025. Of all the fee reductions made by Vanguard in the bond ETF category, the 0.05% cut to VWOB was the largest. It will be hoping that this significant fee cut will help it catch EMB, which tracks a popular JP Morgan bond index.
Categories With Opportunities to Consolidate Its Lead
Vanguard is already the asset leader in most segments of the Ex-U.S. equity ETF category. As of January 31, 2025, its Vanguard FTSE Emerging Markets ETF (VWO) narrowly exceeded BlackRock’s iShares Core MSCI Emerging Markets ETF (IEMG) as the largest broad emerging markets ETF. Similarly, its Vanguard FTSE Europe ETF (VGK) is the largest U.S.-listed exposure with broad equity exposure to Europe. Additionally, it is also the cost leader in the Europe sub-category. VGK’s new expense ratio of 0.06% puts it far below the asset weighted CFRA sub-category average of 0.20%. This recent fee reduction will allow Vanguard to return money to investors and enable it to put additional margin pressure on competitors.
This dynamic of using its economies of scale to put further pressure on competitors will also be at play in categories like dividend and growth/value ETFs. ETFs like Vanguard Dividend Appreciation ETF (VYM) and Vanguard International High Dividend Yield ETF (VYMI) are the largest and among the lowest-cost ETFs in their CFRA sub-categories, creating a virtuous cycle of low fees and asset-gathering momentum.
Looking Ahead
It will be interesting to see how the other leading ETF issuers respond to Vanguard’s aggressive fee reduction strategy. It appears likely that only BlackRock has the scale to sustain such low fees in the core, indexed segments of the market. Schwab, State Street, and Invesco also have competitive fees and significant asset scale in some sub-categories. It is likely that the other large issuers, such as JP Morgan, Capital Group, First Trust and others will focus on higher margin areas of the market like active investing, alternative assets, and options-based strategies. Those are areas where Vanguard does not currently compete in a significant way and therefore does not exert inexorable downward cost pressure on its peers.
Aniket Ullal is SVP, ETF Research and Analytics for CFRA, one of the world’s largest providers of independent investment research. Aniket founded First Bridge Data, a leading source for global ETF data and analytics that was acquired by CFRA in August 2019.
