From the Vanguard effect to the Robinhood & Blockchain effect

By Efi Pylarinou, Investech expert

The rush from major ETF producers to slash fees follows religiously Vanguard’s lead. The natural urge from Robo-advisors to slash fees will undoubtedly lead them to partner with Robinhood. The next big move from Robo-advisors will be towards real-time settlement.

Eric Balchunas, Bloomberg Intelligence analyst, insightfully pointed out that the fee war that has been going on in the US, should be renamed “the Vanguard Effect” simply because the major ETF producers rush to cut their fees, responding SYSTEMATICALLY to the lead of the 43yr old low-cost producer.

“Like Walmart arriving in a new town, the entry of Vanguard into a particular investment area causes a collective gnashing of teeth as other fund managers are forced to drop their prices to compete. That dynamic is borne out in the table below, which shows the cheapest ETF fees for products that do or do not have a Vanguard-provided equivalent.”

Vanguard effect.jpg

Excerpt from: Vanguard’s Gain Is Wall Street’s Pain as Billions Leave the Financial Industry, by Eric Balchunas on Bloomberg

Any ETF with a fee above 15bps (30bps-53bps) in the sample above, is in a sector that Vanguard, the low-cost behemoth has no offering. Vanguard’s business strategy naturally, aims to increase volume (AUM) and with a pace of adding $1trillion in just a few years, they can claim fame to a leading indicator like “the Vanguard effect”.

It took Vanguard 32 years to reach $1 trillion in assets, eight years to get to $2 trillion, but then just three years to get to $3 trillion.” Says Eric Balchunas

Slashing fees is the action-reaction linked to the “Vanguard effect” in the ETF space. In stock trading, I pronounce “The Robinhood effect” as the complete elimination of fees on online investment management platforms. I foresee Fintechs ranging from Motif Investing, Hedgeable, Wikifolio, to SigFig, just to name a few, that will partner with Robinhood as it grows its no-fee offering from one trading venue to another and from one country to another.


Three wealth management Fintechs in the broader wealth management space, just announced partnerships with Robinhood: StockTwits, a stock sentiment platform covered in “Keynes said to watch the “hoi polloi” on Twitter for stock sentiment; OpenFolio, an online portfolio performance platform reviewed in Forbes “Openfolio shows how your investing stacks up” by Tom Groenfeldt; and Quantopian, a crowd sourced hedge fund, covered in “Quantopian- DIY open-sourced trading algorithms and a crowd-sourced hedge fund”.

As I am writing this research note, iDealing, a UK based online broker, joins Robinhood in the Fintech woods that ignore oceans and jurisdictions. “You can now trade European stocks for free, thanks to this lean and mean Fintech company” says Oscar Williams-Grut. iDealing starts covering Dutch, French, and Belgian markets.

We are heading from a low-cost passive ETF offering (off-line or online) to a broader online offering. This will include more of a No cost, Transparent & Actively managed investment offering.

Call it Motifs, Wikis, thematic active ETFs from Ark-Invest, crowd-sourced hedge funds from Quantopian, or plain vanilla stock investments sourced from StockTwits;

“The Robinhood effect” is going to play out.

The next big move that will ride off the Robinhood wave will be towards real time settlement platforms. Robinhood right now, operates in the US with a T+3 settlement as is the norm in the market, which is an obstacle for active trading. I see clusters of Fintechs in the investment and trading business, migrating to real time settlement via platforms that already have a share through the traditional clearing routes (exchanges and dark pools).


Speedroute, that was recently bought by T0 platform (covered in Crypto-securities and crypto-trading: a Fintech revolution with P2P ingredients), is one example of such a routing service that already commands more than 2% of US equity flow. There are many more of course, that are being developed as applications of the blockchain technology that will clearly affect the settlement and clearing business as we know it today.

In 2016, we will be marching towards a Frictionless online investment offering, empowered by “The Robinhood effect” and “Blockchain applications in settlement procedures”.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou specializes in disruptions, innovations and trends in investments and capital markets. 


  1. […] („Akinek barát kell, tartson kutyát.” – 1987) talán nem kell bemutatni, de hogy mi az a „Vanguard Effect”, kevesek számára lehet ismert. Röviden: jött Robinhood és megette Gordon Gekko ebédjét. […]

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