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February 25, 2011 at 04:31 AM
Vanguard, the largest U.S. fund firm with some $1.6 trillion in assets, introduced its first ETF – the Vanguard Total Stock Market ETF (VTI) — in 2001. It now offers 64 ETFs with aggregate assets of $152 billion.
The company, which is mutually owned by its funds, led the ETF industry in net cash inflows last year, with inflows of $35.4 billion. (This represents about $1 of every $3 invested in ETFs).
In 2010, Vanguard introduced 20 new ETFs, including some benchmarked to S&P and Russell indexes and lowered the expense ratio of seven of its international-index funds.
The firm’s ETFs have an average expense ratio of 0.18%, and the Vanguard S&P 500 ETF features the industry’s lowest expense ratio of 0.06%, according to the company.
A recent report by Morgan Stanley recognized Vanguard ETFs for their precision at tracking their underlying indexes. And the firm was the top-ranked ETF provider in terms of advisor loyalty according to a study released by by Cogent Research in September 2010.
To understand what’s behind Vanguard’s current success in the ETF field, AdvisorOne spoke with Gus Sauter, the company’s chief investment officer, who just returned from a trip to Asia (including stops in Japan, South Korea and Taiwan).
Sauter, 56, joined Vanguard in 1987, two weeks before the Black Monday crash on October 19.
What is Vanguard’s position within the ETF field?
As of today, we have 64 ETFs. The iShares ETFs have substantially more, about three or four times our quantity.
Our approach is different from those of our competitors. We offer broadly diversified products that can be used as building blocks in portfolios rather than more narrowly defined ETFs that investors don’t often make money with, since they are more volatile.
As is the case with more narrowly defined and industry-specific mutual funds, investors tend to get in to such ETFs when the products are reaching new highs and then ride them down.
We were ahead of iShares in terms of net cash flows in 2010. But iShares is still bigger in overall assets, though we are catching up.
We are gaining momentum as we expand the sales force and focus on the product lineup most investors should be focused, like the Total Stock Market Index Fund. It’s really hard to say that U.S. investors shouldn’t be in that. Big blockbuster-type funds should appeal to most investors.
And we’re gaining momentum, primarily with investment and other financial advisors.
What are your thoughts on today’s investing trends, and Vanguard’s relationship with advisors?
This business is always interesting and unpredictable. I cannot recall a time when investing has been s so hard, but when was it easy?
It’s exciting to see ETFs develop, and this has opened up a new marketplace for Vanguard. For our business, it’s exciting to work so much with financial advisors.
Advisors are very much embracing ETFs, which are more convenient for them, since ETFs trades on their equity platforms and thus work perfectly with their [investing] systems.
What level of ETF flows does Vanguard see from investors vs. from advisors?
It’s hard to pinpoint exactly, but roughly 20% of our flows come directly from individuals, and over 50% are clearly through financial and investment advisors. The other 30% is from endowments, foundations, defined-benefit plans, institutions and traders.
How have you established such a strong reputation with advisors?
Most advisors investing in our ETFs share our values and focus on broad diversification, and they’re very concerned about costs and tax efficiency. As they look at all these characteristics, we pass through their screens.
As I mentioned earlier, we have increased sales force and are able to establish relationships with more advisors than before and to help advisors better help their clients.
How does Vanguard keep its costs down?
We’re unique in the fund industry in that we are mutually owned. Thus, with large funds, like the Total Stock Fund, we are able to offer low costs given our huge economies of scale.
This is also true of our fund structure, in that our ETFs are a share class of the existing index fund, which enables us to have critical mass on day one.
