Vanguard CIO Defends ETFs, Calls for More Education

Gus Sauter says the product isn't causing unusual volatility in the U.S.

Vanguard CIO Gus Sauter said Monday that the ETF industry needs to do more to educate investors about its products. Sauter, who spoke at an ETF conference, also defended the products, which have been criticized in the past year or so.

“I believe that as providers of ETFs and as distributors of ETFs, we have a responsibility to make sure the investing public is as informed about ETFs as it can be,” said Sauter (left), during a speech at the IndexUniverse’s Inside ETFs conference in Hollywood, Fla. “Everyone in this room has an opportunity to help investors reach their goals. It starts with ETFs 101.”  

Sauter noted that ETFs have been blamed for market problems, such as the May 2010 Flash Crash and ongoing volatility. However, he noted, “ETFs are much more dominant in the U.S. market than in Germany, but market volatility in each has been the same–exactly the same.”

A recent Lipper analysis suggests that investors need to watch their purchases of the most popular ETFs due to extreme volume and volatility. This is due to the fact that ETFs, like the SPDR S&P 500 ETF (SPY), are being used for short-term trading by institutions, according to Matthew Lemieux.

From 2000 to 2010, assets in ETFs grew by about 30% per year, Vanguard says, vs. 5% annual growth for traditional mutual funds. Some $1.5 trillion in assets worldwide are now held in ETFs.

Sauter says this growth has been generally “good news for investors,” since ETFs carry low costs and can be traded easily.

Advisor’s Alpha

In his speech, Sauter also discussed the concept of an “advisor’s alpha:” a new value proposition for FAs based on their alternative skills and expertise rather than their returns. “The advice perspective and planning that today’s advisor provides is far more valuable than a buy, sell, or hold call,” he explained.

The fund group now manages nearly $171 billion in ETF assets, an increase of 15.3% from year-end 2010. It has new cash flows of $36 billion last year.

According to several industry sources, about $1 in every $3 invested in ETFs across the industry was invested in a Vanguard ETF in 2011.

Overall, including tradition funds, ETFs and other products, Vanguard manages about $1.65 trillion in assets.

 

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