Vanguard on the verge of becoming the world's largest ETF

ETFs are attracting more and more investors, both institutional and retail. Unsurprisingly, the U.S. S&P 500 index has the most assets under management, with two funds battling it out for top spot.

For years, State Street Global Advisors' SPDR S&P 500 Trust (ticker SPY) has dominated the market of the most traded ETFs. But according to data from FactSet, LSEG and other sources, Vanguard's ETF (VOO) is gaining momentum and seriously threatening this leadership. As of Friday February 14, State Street's ETF had $633.1 billion in assets under management, compared with Vanguard's $631.8 billion. The gap has narrowed considerably in recent months.

The opposition of a generation

Launched in 1993, SPY was the very first American ETF. It established itself as the preferred choice of hedge funds and traders, thanks in particular to its liquidity and tight spreads. But with the rise of passive management and the massive influx of retail investors, the situation changed. Vanguard, which entered the market in 2010, is attracting a new generation of cost-conscious investors, and could well dethrone the historic leader.

The transition of SPY from a primarily investment tool to a trading vehicle has made its flows more volatile," explains Ryan Jackson, senior analyst of passive strategies at Morningstar. At the same time, competition is heating up. Even giants like BlackRock, Vanguard and State Street now have to contend with challengers like Amundi, who are looking to nibble away at market share. There's more of a battle for market share now," confirms Anna Paglia, Executive Vice President and Chief Commercial Officer at State Street.

A battle of ecosystems

SPY continues to grow in size, as it remains the most traded ETF in the world, assures Anna Paglia. State Street does not see this transition as a loss of leadership, but rather as a market evolution. The company points to strong flows into the SPDR Portfolio S&P 500 ETF, a "mini" version of SPY launched in 2005 for retail investors, with ultra-competitive fees of 0.02%. In January, this ETF was the fifth largest in terms of capital inflows, attracting $3.2 billion, according to a Citi Research report.

We don't look at SPY in isolation," says Paglia. We look at the whole ecosystem. But for Todd Rosenbluth, head of research at VettaFi, this change in dynamics is major. State Street remains a dominant player in the ETF universe, but they are two different products. Vanguard may finally be on the verge of toppling its historic rival.