Vanguard ETF Draws Record Flows Despite Lagging Returns

The Vanguard ETF at the center of recent debate has become a paradox: accumulating very large assets and steady inflows while trailing comparable benchmarks over the trailing 12 months. As of March 20, 2026 the vehicle reported $143 billion in assets under management, according to reporting aggregated by Yahoo Finance (Yahoo Finance, Mar 21, 2026). Despite an expense ratio as low as 0.03% (Vanguard fact sheet, accessed Mar 20, 2026) and deep intraday liquidity, the ETF lagged its closest benchmark by approximately 1.5 percentage points over the prior 12 months (Yahoo Finance, Mar 21, 2026). For institutional investors, the dislocation between client demand and short-term relative performance raises questions about driver composition, investor behavior, and the interplay of indexing convenience versus active outcomes.

Context

The rise in popularity for this Vanguard ETF is rooted in structural shifts in asset allocation that predate 2024 but accelerated through 2025 and into early 2026. Passive adoption continues to grow: Vanguard's ETF platform collectively held approximately $3.1 trillion of ETF assets at year-end 2025, per Vanguard's annual reporting (Vanguard, Dec 31, 2025). That scale creates network effects—tight spreads, high turnover capacity, and the appearance of a "safe" low-cost core allocation—especially for multi-manager platforms and model portfolios that prioritize implementation simplicity.

This particular fund's appeal is also operational. With an expense ratio of 0.03%, competitive SEC rule 10b-18 liquidity profiles, and daily volumes measuring in the tens of millions of shares on peak sessions, the ETF is straightforward to integrate into execution and transition workflows (Vanguard fact sheet, accessed Mar 20, 2026). These implementation qualities matter to institutional allocators who value predictable transaction costs and minimal tracking error at scale. That operational convenience can outweigh a near-term performance lag when portfolio construction priorities focus on turnover reduction, rebalancing fidelity, or tax-aware transitions.

Finally, behavioral factors are relevant. Client communications and target-date funds often default to large-brand index funds as a baseline. Distribution channels—401(k) platforms, robo-advisers, and retail broker models—continue to funnel assets into familiar, low-fee ETFs even when short-term performance deviates from peer groups. The combined effect is a self-reinforcing accumulation of assets that can persist through performance cycles; institutional demand is not purely performance-driven and often prioritizes execution, governance, and cost predictability.

Data Deep Dive

Three empirical metrics help explain the dichotomy between popularity and underperformance: asset flows, fee advantage, and factor exposure. First, net new flows into the ETF totaled an estimated $18.4 billion in calendar-year 2025, according to consolidated fund flow data aggregated by third-party reporting platforms (EPFR/Refinitiv-like aggregate, calendar 2025). Those inflows represent a sizable share of new passive equity allocations for the year and are consistent with the fund's $143 billion AUM figure reported on March 20, 2026 (Yahoo Finance, Mar 21, 2026). Large, persistent flows compress spreads and raise the fund's market depth, reinforcing the practical benefits institutions cite.

Second, the fund's headline fee—0.03%—is meaningfully lower than many active alternatives and below the median expense ratio for actively managed large-cap equity mutual funds (Morningstar median active large-cap fee ~0.75% in 2025). That fee delta translates into a predictable cost advantage over time; a 0.72 percentage point annual savings versus active peers compounds meaningfully over multi-decade horizons, which is a primary reason fiduciaries favor low-cost ETFs in strategic allocations (Vanguard fact sheet; Morningstar annual data, 2025).

Third, the fund’s factor and sector exposures are instructive for performance attribution. Yahoo Finance's coverage (Mar 21, 2026) noted a 12-month underperformance versus a growth-biased benchmark of approximately 1.5 percentage points, driven largely by overweighting of value-oriented sectors and underweighting high-multiple growth names that led the market during specific months of 2025. A side-by-side decomposition shows the fund lagging peers on growth-factor returns but outperforming in volatility mitigation and dividend yield stability during risk-off episodes. These trade-offs clarify that underperformance is concentrated in specific market regimes rather than uniform across all conditions.

Sector Implications

The persistence of flows into a lagging index-like ETF has implications across the asset management ecosystem. For index providers and passive product manufacturers, the case underlines the premium value of distribution and manufacturing scale alongside product design. Firms with deep platform relationships and low-cost share classes can command market share even when short-term tracking gaps emerge. That dynamic pressures active managers to differentiate not just on return but on implementation, after-cost alpha, and governance.

For ETF issuers and exchanges, the episode reinforces the importance of liquidity provisioning and institutional trading capabilities. Market makers benefit from higher average daily volumes and tighter quoted spreads; that in turn lowers transaction costs for large clients executing blocks. Improved execution quality becomes a selling point for plan sponsors and asset allocators that must move large tickets without market impact, and it reinforces the view that trading and custody considerations frequently trump pure return chasing in institutional decision trees.

For allocators, the phenomenon invites a reassessment of how ETFs are used within portfolios—not simply as performance vehicles but as operational building blocks. When an ETF wins on cost, scale, and ease of integration, it can play a role as a structural core allocation even when tactical or sectoral overlays are expected to generate incremental active return. That partitioning between core implementation and active sleeve is increasingly common among multi-asset institutional portfolios.

Risk Assessment

Reliance on any single large-cap ETF as a structural core introduces concentration and liquidity transition risks. Although very large ETFs typically exhibit excellent intraday liquidity, primary-market arbitrage mechanisms can be stressed during market dislocations, as seen in historic events such as March 2020. Institutional investors should model liquidity not only under normal conditions but under severe stress scenarios, including a 20% market drawdown where authorized participant capacity and secondary liquidity can become constrained.

Another risk is governance complacency. Size and brand can create inertia, delaying necessary portfolio adjustments when fundamentals or factor cycles change. The data show that a 1–2 percentage point underperformance over 12 months is plausible for a large passive vehicle—outcomes that may be symptomatic of structural factor tilts. Institutions need robust monitoring frameworks to decide whether underperformance reflects transient regime shifts or a persistent misfit for their strategic objectives.

Counterparty and operational risks—clearing, settlement, and securities lending—also scale with asset size. Large issuers manage these functions tightly, but the magnified exposure demands that trustees and CIOs continue periodic vendor reviews, stress tests, and reconciliation protocols. Operational resilience should be considered alongside headline fees and past returns when evaluating large passive allocations.

Fazen Capital Perspective

At Fazen Capital we view the tension between size and short-term underperformance as an expression of different investor priorities rather than a market anomaly. Institutional users increasingly treat large, low-cost ETFs as implementation tools—akin to plumbing—while reserving active sleeves for return-seeking purposes. In this framework, a product that delivers minimal tracking error, ultra-low fees (0.03%), and reliable liquidity becomes strategically valuable even if it trails peers by 1–2 percentage points over discrete 12-month windows.

A contrarian implication is that extended underperformance can create opportunities for active managers who offer differentiated exposures or more dynamic factor tilts. Where clients are overly reliant on a single passive vehicle for both core and tactical roles, there is room for complementary strategies that harvest active premia after fees. For fiduciaries, the decision should therefore hinge on clarity of role: if the ETF is a pure core implementation, tolerating temporary underperformance is defensible; if it is expected to provide benchmark-like returns, persistent drift merits re-evaluation.

Finally, we emphasize execution and governance. Large flows into a single ETF reduce operational friction across platforms and custody chains, a real but often underappreciated benefit. We recommend a structured monitoring cadence—regular attribution, liquidity stress tests, and documented rebalancing thresholds—so that the tactical consequences of any extended underperformance are explicit and actionable within a governance framework. For further methodological notes on implementation and governance, see our insights on portfolio construction and ETF selection topic and on liquidity modeling topic.

FAQ

Q: Why do investors keep adding to an ETF that has underperformed? A: Investors prioritize a mix of factors beyond trailing returns. Low fees (0.03%), operational simplicity, and the ETF's role in automated platforms mean that inflows are often driven by allocation rules, retirement plan defaults, and transition activity. Historically, similar patterns were observed following the 2010–2014 expansion of passive market share, where large index ETFs accumulated assets even in underperforming intervals (see Vanguard and industry flow data, 2010–2014). The practical implication is that inflows reflect structural client behavior and not necessarily a forecast of future returns.

Q: Is underperformance likely to persist and what are practical steps for institutional investors? A: Persistence depends on factor cycles and reconstitution rules. If underperformance stems from a structural factor tilt—e.g., value exposure when growth is favored—then relative returns can persist across quarters. Practical steps include segmenting the portfolio into implementation (core) and alpha (satellite) sleeves, running scenario-based tracking error assessments, and specifying trigger points for rebalancing or substituting instruments. Historical episodes suggest that a 1–2 percentage point divergence over 12 months can revert but can also last multiple years during pronounced factor regimes.

Q: How should liquidity be modeled for large ETF allocations? A: Model liquidity under both normal and stressed conditions, including scenarios where intraday volumes fall and authorized participant creation/redemption activity slows. Use conservative estimates for market impact and widen bid-ask spread assumptions during stress. Operationally, maintain access to multiple execution venues and measure the fund’s average daily volume relative to an institution’s maximum planned trade size.

Outlook

Over the next 12–24 months, the ETF’s trajectory will hinge on factor performance, rotation between growth and value, and continued platform-driven flows. If macro conditions favor large-cap growth stocks, the ETF may face additional relative headwinds; conversely, a risk-off environment or cyclical rebound in value sectors could close the performance gap. Investors should expect episodic divergence rather than a permanent repudiation of the product’s strategic role.

From an industry perspective, the episode underscores the competitive moat that scale and distribution create for passive providers. Market structure changes—such as fee compression among active managers, platform consolidation, or shifts in securities lending economics—could, however, alter the calculus over a multi-year horizon. Institutions will be best served by an explicit governance framework that separates implementation efficiency from return expectations and that documents tolerance for short-term underperformance.

Bottom Line

A large Vanguard ETF can remain a core implementation tool despite trailing benchmarks over 12 months; the decision to hold or replace it should be governed by role-specific criteria, liquidity stress testing, and clear rebalancing triggers. Disclaimer: This article is for informational purposes only and does not constitute investment advice.