Don't Forget Bonds
May 22, 2007
What I find interesting in all this is the response from BGI … or, rather, the lack of a response. BGI hasn’t budged on fees in any of these funds. In fact, last year, BGI cut fees on many single country ETFs … but left EFA and EEM prices intact. I guess they have real faith in first-mover advantage.
Another company impacted by all this is SSgA, which has been aggressively moving into the international space with new ETF launches this year. They are offering some great ETFs, but the aggressive price points from Vanguard will make it that much harder to win market share.
A few side points on the new Vanguard EAFE ETF:
1) The issue with its tie to the Vanguard International Tax Managed Fund isn’t necessarily that the ETF will lag the index. Rather, tax management creates tracking error that goes both ways. Last year, the fund lagged its index; over the past five years, it’s actually beaten its benchmark. You just can't be 100% sure how it will come out.
2) Jim raises a good point about how capital gains tax overhang from teh underlying fund also overhangs the ETF itself. That remains a potential issue for the Vanguard ETFs.
Here’s the flipside of that story: the ETF will make the underlying fund more tax efficient. The fund will be able to slough off its highest cost positions during the ETF’s creation and redemption process, which will mean better after-tax results over time.