If you own an exchange-traded fund (ETF) or an index fund, chances are they are owned by Vanguard or Blackrock. These two companies are industry leaders. Vanguard has $7.9 trillion in assets under management, while Blackrock has $9.5 trillion. In this post, we’ll take a closer look at Vanguard and Blackrock funds to share the pros and cons of each company.
Background: Vanguard vs. Blackrock Funds
Vanguard
Vanguard was founded in 1975 by Jack Bogle, who believed that a mutual fund company should not have outside owners. Instead, Vanguard Group shareholders own the company’s various funds. Thus, shareholders are the actual owners of Vanguard. Vanguard is publicly traded, which is different from most other well-known investment companies. However, Vanguard has designed its structure to be unique in order to only make money for its clients.
Vanguard launched the first index mutual fund in 1976. Over the years, they have expanded into exchange-traded funds (ETFs) and due date funds while maintaining low fees for their funds. Today, Vanguard boasts more than $7 trillion in assets under management.
Blackrock
Blackrock started in 1988 with eight people in one room who shared a determination to put customer needs first. By 1999, Blackrock had grown rapidly 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 was also instrumental in weathering the financial crisis by working with other firms to properly value mortgage-backed securities.
Blackrock may not be as famous as Vanguard, but the company has more than $9.5 trillion in assets under management. Their assets under management include equities, fixed income, cash management, alternative investments, real estate and advisory strategies. It is also important to know that Blackrock is the parent company of the iShares ETF group, which we will refer to frequently below.
Index funds, exchange-traded funds and mutual funds
Before we get into some of the differences between Vanguard and Blackrock funds, let’s first look at some terms. Even in personal finance, I sometimes remind myself of the differences between index funds, exchange-traded funds (ETFs), and mutual funds. All three are similar, although there are slight differences. Therefore, in the rest of this post, when we discuss Vanguard and Blackrock funds, we will refer to each of them interchangeably.
Index funds
An index fund is a type of mutual fund or ETF, although the unique aspect always corresponds to the components of an index or a particular financial market. Index funds represent a theoretical segment of the market and aim to match risk and reward to a specific need. For example, one of the most popular index funds copies the S&P 500. Fund managers adjust the fund according to the performance of this index. Unlike ETFs and mutual funds, index funds only trade once a day after the market closes.
Exchange-traded funds (ETFs))
An exchange-traded fund (ETF) is usually matched to an index, similar to investing in an index. However, an ETF can be traded on an exchange, which is one of the most significant differences between an ETF and an index fund. In addition, ETFs can be bought and sold during the day on the exchange rather than at the end of the trading day. ETFs also typically have lower minimum investments compared to index funds. There are also small tax advantages with ETFs based on their structure.
Mutual funds
Index funds and ETFs are mutual funds. However, mutual funds can be much broader than passively managed index funds or ETFs.
Passively managed funds, such as the S&P 500 index fund, invest in line with the respective index. In other words, the fund buys the same number of shares of 500 shares in the index in the same proportion of the index. The S&P 500 is what is called a capitalization-weighted index. This is a fancy investment term that means that larger companies make up a larger portion of the fund. Most Vanguard and Blackrock index funds are cap-weighted.
With actively managed funds, fund managers deviate from a particular index in an attempt to outperform that index through stock selection. Some mutual funds will pool stocks, bonds, and even other assets into specific funds in an attempt to outperform the market. Unfortunately, research shows that the most actively managed mutual funds do not outperform the market. You will hear the term mutual fund used interchangeably with index funds and ETFs, which is appropriate. However, it is important to understand that mutual funds cover a wider range of funds.
Most Popular Vanguard Funds vs. Blackrock Funds
Next, consider three more popular funds Vanguard and Blackrock. We’ll dig deeper to understand the similarities and differences between their most popular funds. We’ll focus on ETF mutual funds for a better comparison, although Vanguard is better known for its index funds than Blackrock.
S&P 500 ETF: VOO vs. IVV
Vanguard and Blackrock are the Vanguard 500 Index Fund ETF (VOO) and the iShares Core S&P ETF (IVV) are two of the most popular funds. At first glance, these tools are almost identical, although there are slight differences between them. For example, expense ratios for each fund are 0.03%, which is exceptional when you consider the high fees associated with some actively managed mutual funds, which may not vary much.
IVV has more assets under management: $326.25 billion versus $272.97 billion for VOO. The underlying index for both is, of course, the S&P 500. Ironically, the number of holdings is slightly different: 507 for IVV versus 508 for VOO. With that said, if you’re looking for a fund that reflects the S&P 500, it’s hard to go wrong with any of these options.
Total Stock Market ETF: VTI vs. ITOT
Next, we compare the Vanguard Total Stock Market (VTI) ETF and the iShares Core S&P Total US Stock Market ETF (ITOT). Buying any of these ETFs will give you ownership of a tiny fraction of the entire stock market. VTI is also similar to the Vanguard Total Stock Market Index Fund (VTSAX) in the space of financial independence.
VTI and ITOT are similar but have more significant differences than VOO and IVV. For example, assets under management of VTI are $284.47 billion and ITOT is $44.31 billion. In addition, the average daily volume of VTI is higher (955.94 billion) than ITOT (258.7 billion). A higher daily trading volume means that the security is more competitive and less volatile.
The number of holdings is also slightly different. VTI tracks the CRSP US total market index and has a total of 4,102 holdings. ITOT tracks the overall S&P market index and has 3,653 holdings. The performance-to-cost ratio of VTI and ITOT has been very similar over the years, so again, there are more similarities than differences between the two ETFs.
Emerging Market ETFs: VWO vs. EEM
Finally, let’s take a look at two emerging market ETFs: the Vanguard Emerging Market ETF (VWO) and the iShares Emerging Market ETF (EEM). Unlike the first two ETFs, these stocks have a strong international presence. VWO and EEM tend to include stocks of countries that are growing and becoming more involved in the global economy. Owning an ETF like VWO or EEM is a great way to diversify your portfolio around the world.
The difference in expense ratios between the two ETFs is slightly different. In the four ETFs we reviewed earlier, expense ratios were extremely low at 0.03%. As a reminder, investors pay a proportion of the administration costs of the fund in which you invest. The expense ratio for Vanguard VWO is slightly higher at 0.1%. However, the expense ratio for EEM Blackrock is 0.7%. Once the expense ratio approaches 1%, it can reduce the return on your long-term investment. For example, an expense ratio of 0.6% difference could cost an investor thousands of dollars in the long run.
Unlike the other two examples, there are performance differences over the years. For example, the ROI for VWO over the last five years was 9.16% compared to 8.60% for EEM. Interestingly, in the last year of negative returns, VWO’s return was also higher than EEM’s: -3.73% compared to -8.79%. This example is just one snapshot in time; while you often see higher yield ETFs on the positive side, you will also see lower returns on the negative side. Over the past few years, VWO has resulted in more favorable returns on both the high and low side.
Who owns Vanguard and Blackrock?
The final comparison we will make is the differences between the Vanguard and Blackrock ownership structures. As noted earlier, Vanguard has a unique ownership structure in which customers own the company and no third party owners seek to profit from the company’s investment. Shareholders of the Vanguard Funds own Vanguard. Vanguard essentially operates at the expense of its investors, and any profits are returned to investors through Vanguard funds.
On the other hand, Blackrock is a publicly traded company looking to make a profit for its shareholders. Can you guess who is Blackrock’s biggest shareholder? If you thought about Vanguard, you would be right. Of course, you can draw your own conclusions about what this means, but the fact that Vanguard owns approximately 7% of Blackrock is certainly intriguing.
Should you invest in Vanguard or Blackrock funds?
From the above comparison, it can be seen that there are no significant differences between similar funds Vanguard and Blackrock. Your decision on where to invest your money may depend on other factors such as the convenience of their platform or other services related to how you use a particular company. Some Blackrock funds may have higher fees than Vanguard, so you need to make sure you check the fees for any fund you decide to invest in.
I love that Vanguard’s primary interest is in keeping the owners of their funds happy, not the shareholders, though that doesn’t necessarily mean that Blackrock’s intentions are bad. If you have taken steps to build a solid financial footing and are now investing in a brokerage account, then you will probably do just fine whether you invest in Vanguard or Blackrock.
This article originally appeared on Wealth of Geeks.