Vanguard making headway in expanding ETF field

The Vanguard Group, best known for traditional index mutual funds, is surging in a fast-growing area of the investment world, defying past predictions that it would be swept aside by competitors selling a rival type of fund that also mimics indexes.

Last year, Vanguard captured one of every three new dollars invested in these so-called exchange-traded funds, commonly known as ETFs, which are bought and sold throughout the day on a stock exchange, much like stocks, though most ETFs track an index.

They first gained popularity during the dot-com bubble, giving traders a way to react quickly to sharp moves in the market.

Because of that association with short-term thinking, ETFs met with resistance at Vanguard, where founder John Bogle's gospel of long-term, low-cost investing is ingrained in the culture.

"We wanted to make sure we were doing it our way and in a way that was not just, I'll say, pandering to short-term fads, but was really built upon long-term principles," said Vanguard's current chairman and chief executive officer, F. William McNabb III.

"Maybe we were a little slower to get going than we should have been in hindsight, but on the other hand I feel really good about the way we've done it. I think the track record now is beginning to show that," McNabb said.

Vanguard, based in Tredyffrin Township, Chester County, is the nation's biggest mutual fund company with $1.38 trillion under management as of Nov. 30, according to the Investment Company Institute, a trade group. It is among the biggest employers in the region, with 9,200 of its 12,300 employees here.

Being a significant player in the ETF market is important to Vanguard's future, if analysts who predict continued ETF growth are right.

Vanguard opened its first ETF in 2001, but the company has become a force only in the last two years, when its ETF assets more than tripled, to $148.23 billion from $45.52 billion. That put it in third place in the industry. Vanguard spurred sales last year by eliminating commissions on ETFs bought and sold through its brokerage unit.

BlackRock Inc.'s iShares remain firmly in the lead, with $448.5 billion in U.S. assets at the end of last year, but iShares' market share has fallen to 44.6 percent from 59.3 percent at the end of 2006, data from Strategic Insight, a research firm, showed.