If you’re an owner of an exchange-traded fund (ETF) or index fund, chances are they are from either Vanguard or Blackrock. These two companies are the powerhouses in the industry. Vanguard has $7.9 trillion in assets under management, and Blackrock has $9.5 trillion. This post will take an in-depth look at Vanguard vs Blackrock funds to share the pros and cons of each company.
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Background: Vanguard vs Blackrock Funds
Vanguard was established in 1975 by Jack Bogle, who believed that a mutual fund company should not have outside owners. Instead, shareholders of the Vanguard Group own the company’s different funds. Thus, the shareholders are the actual owners of Vanguard. Vanguard is publicly traded, which differs from most other prominent investment firms. However, Vanguard designed its structure to be unique to make money for only its clients.
Vanguard launched the first index mutual fund in 1976. Over the years, they have expanded into exchange-traded funds (ETF) and target-date funds, all while keeping fees around their funds low. Today, Vanguard boasts more than $7 trillion in assets under management.
Blackrock started in 1988 with eight people in a single room who shared a determination to put clients’ needs first. By 1999, Blackrock rapidly grew to $165 billion in assets under management and then went public on the New York Stock Exchange. Over the years, Blackrock has acquired several other companies, such as Merrill Lynch Investment Management (2006) and Barclay Global Investors (2009). Blackrock also played an essential role in helping to navigate the financial crisis by working with other firms to value mortgage-backed securities properly.
Blackrock may not be as well known as Vanguard, but the company has more assets under management with more than $9.5 trillion. Their assets under management include equity, fixed income, cash management, alternative investment, real estate, and advisory strategies. It’s also important to know that Blackrock is the parent company for the iShares group of ETFs, which we will frequently reference below.
Before we get into some of the differences in Vanguard vs Blackrock funds, let’s first cover some of the terminologies. Even in the personal finance space, I occasionally remind myself of the differences between index funds, exchange-traded funds (ETFs), and mutual funds. All three are similar though there are subtle differences. So for the remainder of this post, as we discuss Vanguard vs Blackrock funds, we’ll refer to each interchangeably.
An index fund is a type of mutual fund or ETF, though the unique aspect always matches the components of an index or specific financial market. Index funds represent a theoretical segment of the market and aim to match the risk and reward of a specific need. For example, one of the most popular index funds mirrors the S&P 500. Fund managers set up the fund to match the performance of that index. Unlike ETFs and mutual funds, index funds only trade once per day after the market closes.
An exchange-traded fund (ETF) typically matches an index similar to index investing. However, an ETF can trade on an exchange, one of the most significant differences between an ETF and an index fund. In addition, an ETF can be bought and sold throughout the day on an exchange instead of trading day end. ETFs also typically have lower minimum investments compared to index funds. There are also minor tax advantages with ETFs based on their structure.
Index funds and ETFs are both mutual funds. However, mutual funds can be much broader than passively managed index funds or ETFs.
Passively managed funds, like the S&P 500 Index fund, invest in a way that matches the corresponding index. In other words, the fund buys the same amount of share of the 500 stocks in the index in the same proportion of the index. The S&P 500 is what’s called a cap-weighted index. That’s a fancy investment term that means the larger companies make up a more significant portion of the fund. The majority of index funds of Vanguard and Blackrock are cap-weighted.
With actively managed funds, fund managers deviate from a particular index attempting to outperform that index with their security selection. Some mutual funds will combine stocks, bonds, and even other assets into certain funds in their attempt to outperform the market. Unfortunately, research shows that most actively managed mutual funds do not beat the market. You’ll hear the term mutual fund used interchangeably with index funds and ETFs, which is appropriate. However, it is essential to understand that mutual funds cover a broader spectrum of funds.
Most Popular Vanguard vs Blackrock Funds
Next, let’s look at three more popular Vanguard and Blackrock funds. We’ll dig deeper to understand any similarities and differences between their most popular funds. We will focus on ETF mutual funds for the best comparisons even though Vanguard is more known for index funds than Blackrock.
S&P 500 ETFs: VOO vs IVV
The Vanguard and Blackrock funds are the Vanguard 500 Index Fund ETF (VOO), and iShares Core S&P ETF (IVV) are two of the most popular funds. On the surface, these funds are nearly identical, though there are subtle differences between the two. For example, the expense ratios for each fund are 0.03%, which is exceptional when you consider the high fees associated with some actively managed mutual funds that may not be that much different.
IVV has more assets under management with $326.25 billion vs VOO’s $272.97 billion. The underlying index for both is, of course, the S&P 500. Ironically, the number of holdings differs slightly, 507 for IVV vs 508 for VOO. With that said, if you’re looking for a fund that mirrors the S&P 500, you would be hard-pressed to go wrong with either of these options.
Total Stock Market ETFs: VTI vs ITOT
Next, we’ll compare the Vanguard Total Stock Market ETF (VTI) and iShares Core S&P Total U.S. Stock Market ETF (ITOT). Purchasing either of these ETFs will give you some ownership in a tiny sliver of the entire stock market. VTI is also similar to the Vanguard Total Stock Market Index Fund (VTSAX) in the financial independence space.
VTI and ITOT are similar but have more significant differences than VOO vs IVV. For example, the assets under management for VTI are 284.47 billion and $44.31 billion for ITOT. In addition, the average daily volume is higher for VTI at 955.94 billion than ITOT at 258.7 billion. A higher daily trading volume means that the security is more competitive and less volatile.
The number of holdings also differs quite a bit. VTI tracks against the CRSP U.S. Total Market Index and has a total of 4,102 holdings. ITOT tracks against the S&P Total Market Index and has 3,653 holdings. The performance and expense ratios of VTI and ITOT have been very similar over the years, so again, there are more similarities between these two ETFs than differences.
Emerging Market ETFs: VWO vs EEM
Finally, let’s look at two emerging market ETFs with the Vanguard Emerging Market ETF (VWO) and iShares Emerging Market ETF (EEM). Unlike the first two ETFs, these stocks have a solid international presence. VWO and EEM tend to include stocks from nations growing and becoming more engaged in the global economy. Owning ETFs like VWO or EEM is a great way to diversify your portfolio globally.
The difference in expense ratios is quite a bit different between these two ETFs. In the four ETFs we previously reviewed, the expense ratios were extremely low at 0.03%. As a reminder, investors pay an expense ratio for the fund’s administrative costs where you are investing. The expense ratio for Vanguard’s VWO is not much higher, at 0.1%. However, the expense ratio for Blackrock’s EEM is 0.7%. Once an expense ratio approaches 1%, it can eat into your long-term investment returns. For example, an expense ratio with a 0.6% difference could cost an investor thousands of dollars over the long term.
Unlike the other two examples, there are differences in performance over the years. For example, the return on investment for VWO over the past five years has been 9.16% compared to 8.60% for EEM. Interestingly, over the past year, where there have been negative returns, VWO also has a better return than EEM at -3.73% compared to -8.79%. This example is only one snapshot in time; though you often see an ETF with higher returns on the positive side, you’ll also see lower returns on the negative side. VWO has led to more favorable returns both on the high and low sides over the past several years.
Vanguard has several popular international and world ETFs including Vanguard FTSE All-World Ex-US ETF (VEU) and Vanguard Total International Stock Index Fund ETF (VXUS). Blackrock has the iShares Global 100 ETF (IOO).
One final comparison we’ll make is the differences between the ownership structure of Vanguard and Blackrock. As noted earlier, Vanguard has a unique ownership structure where the clients own the company, and no outside owners seek to profit from the company’s investments. Shareholders of the Vanguard funds own Vanguard. Vanguard essentially operates at cost for its investors, and any profits come back to investors through Vanguard’s funds.
On the other hand, Blackrock is a publicly-traded company seeking to profit its shareholders. Can you guess who Blackrock’s largest shareholder is? If you thought Vanguard, you would be right. Of course, you can draw your conclusions about what that means, but the fact that Vanguard owns about 7% of Blackrock is undoubtedly intriguing.
From the comparison above, you see there aren’t significant differences between similar Vanguard and Blackrock funds. Your decision on where to invest your money may come down to other factors such as the convenience of their platform or other services on how you use either company. There may be some Blackrock funds that have higher expense fees than Vanguard, so you’ll want to ensure you’re reviewing fees for any fund where you decide to invest.
I do like that Vanguard’s primary interest is keeping the owners of their funds happy as opposed to shareholders, though that doesn’t necessarily mean that Blackrock’s intentions are bad. If you’ve taken steps to build a solid financial foundation and are now investing in a brokerage account, then you’ll probably end up doing just fine whether you invest in Vanguard or Blackrock.
This article by Mark Patrick of the Financial Pilgrimage blog originally appeared on Wealth of Geeks and, was republished with permission.
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