At the Inside ETFs 2016 conference in Hollywood, Florida, Vanguard Chairman & CEO Bill McNabb made “a plea to competitors” to slow the pace of product proliferation.
“The industry is [introducing a new] ETF, it feels like, every 30 seconds. This is like the 1980s and mutual funds. Things did not end well for all those funds,” he said to an audience of roughly 2,200 advisors and other financial services professionals attending the four-day event.
In Vanguard’s view, investors instead “need basic building blocks,” he added. “We have to be very careful. If we go too far as an industry, people will have doubts about the original construct. And some categories are pretty esoteric.”
Two hundred eighty-five new funds were introduced in 2015, according to Dave Nadig, director of ETFs for FactSet, who spoke after McNabb. This includes funds launched by 23 new issuers.
Commenting on smart-beta ETFs, “or so-called smart beta,” McNabb said, “I think it is one of the greatest names ever.”
Vanguard views these funds “not as indexing” per se but more “as active management, though the bets are done in highly automated … ways.”
There is a “place for those expressing a market view in a low-cost way,” McNabb said. Vanguard has not moved in this direction in the U.S., he adds, but it has factor-based offerings in non-U.S. markets
As for the dominance of the three big ETF players — Vanguard, State Street and BlackRock — the executive thinks there “is space” in the field for smaller players, though he adds that further “splicing and dicing” of investments “probably may not be successful.”
Industry experts do not always anticipate trends in innovation correctly. For instance, Vanguard and others did not expect ETFs as a product to emerge and resonate with investors. “Look at what we did in ’93,” he said, referring to the company’s move not to embrace the product. (BlackRock was the first to do so.)
“But, we got here,” McNabb explained. “There are ways people can still innovate and be successful.”
“We are really a do-it-yourself shop, and increasingly clients asked for help… this kind of advice …, ” he said. “Our target audience for our robo offering is very different from that of the average client of a financial advisor.”
Vanguard is serving smaller accounts with about $50,000 vs. higher net worth investors who typically work with advisors. “Smaller investors deserve the same experience as those who are wealthy,” McNabb explained.
He noted that that success in the robo-advice field depends on being able differentiate a program. “The ability to personalize it is very important.”
The blame placed on ETFs as a cause of the Aug. 24 market drop is “completely false,” he says, pointing at a case of new trading rules that came into play and affected the markets in ways “that were not exactly as expected.”
In times like these dominated by market volatility, “We tell investors and advisors that it is really important to get the behavioral stuff right around goals and implementation around [a diversified way of investing.]”
It’s not a time for taking shortcuts. “Lower expectations mean that some look for shortcuts to boost performance, and that usually does not work,” he said.
In these conditions, it’s best to remember the need “to be very disciplined over the long run. You can lose a lot [of money] when you move away from your principles.”
McNabb also is quite bullish on indexing: “We will see a significantly higher indexing level five years from now. We will start to see this become a broader and more global [phenomenon].”
More Advice for Advisors