ETF industry should develop new products, better educate investors: Vanguard CIO

The exchange-traded fund industry needs to develop new products and get better at educating investors about ETFs, said Vanguard Chief Investment Officer Gus Sauter, speaking at the IndexUniverse conference.

From 2000 to 2010, assets in ETFs grew by about 30 percent per year. By comparison, traditional mutual funds grew by about 5 percent over the same time frame.  ETFs now hold about $1.5 trillion in investor assets, he said.

This rapid growth has been good for investors, providing them with greater access to diversified, low-cost index funds, as well as advisors, providing them with simple, flexible investment tools for building well-constructed portfolios for their clients.

He added that ETFs have been blamed for many problems, including creating the May 2010 Flash Crash to ongoing market volatility. In rebutting the criticism, Sauter compared the volatility of the U.S. stock market to that of the German stock market.

“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,” he said.

Sauter added that, “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. Everyone in this room has an opportunity to help investors reach their goals. It starts with ETFs 101.”

He also discussed the concept of “advisor’s alpha.” Traditionally, the value proposition for many advisors has been based on their investment acumen and prospects for delivering higher returns than those of the markets. But, no matter how skilled the advisor, the path to better investment results may not lie with the ability to pick investments or strategies, he said. Instead, advisors should consider a new value proposition based on alternative skills and expertise. That is, they have a greater probability of adding value, or alpha, through relationship-oriented services, such as providing cogent wealth management and financial planning strategies, discipline, and guidance, than by attempting to outperform the market.

“The advice perspective and planning that today’s advisor provides is far more valuable than a buy, sell, or hold call,” he said.

Vanguard manages nearly $171 billion in ETF assets, an increase of 15.3 percent from year-end 2010. Vanguard, headquartered in Valley Forge, Pa., is one of the world’s largest investment management companies and a provider of company-sponsored retirement plan services.


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