Vanguard CEO Bill McNabb on ETFs vs. Other Funds

Vanguard CEO Bill McNabb on ETFs vs. Other Funds Eric Schurenberg: Hi! We’re here today at the Morningstar Investment Conference and it’s my pleasure to be speaking to the CEO of Vanguard, Bill McNabb. Bill thanks for joining us. Bill Mc-Nabb: Eric, it’s a pleasure to be here. Eric Schurenberg: All right, Bill, Vanguard just recently introduced 20 new ETF’s following a whole range of indexes. Vanguard seems to be casting in awful lot of its future on the ETF. So, if you're a small investor and you're trying to make a decision whether to put your money into an index fund, whether it’s a regular mutual fund or an ETF, how do you decide? Bill Mc-Nabb: Well, we offer both and you're right, we are trying to take the message of low-cost investing to a broader and broader kind of people. I think, which structure you use, we’re actually in different. It’s really what—needs the best. So, if you're somebody who’s going to invest every two weeks, the traditional fund is probably the better, more efficient structure. If you're somebody who’s going to buy once and fold forever, you’re probably indifferent. If you're somebody who values the ability to get out of opposition in the middle of the day then the ETF certainly makes more sense. Eric Schurenberg: That makes sense but now, among the other changes you’ve made recently was to eliminate commissions on Vanguard ETF. So, that was one of the main obstacles that kept people from investing in ETF’s. Bill Mc-Nabb: That’s right. I mean the commission cost, when you add that up it - - you had to do the math as to which vehicle make sense and we have reduced -- for people who use our brokerage services, we’ve eliminated that so that again, we want people to make the decision less on price but more on what structure meets their needs as investors. And then of course, versus our competition, we want to have the best price. Eric Schurenberg: Yes, right. So, from what you said, it sounds like really the thing that determines it, is whether you value the ability to trade during the course of the day. Bill Mc-Nabb: Well again, we don’t promote trading -- that flexibility is something people do like. I’ll tell you that -- here is the -- it’s kind of a wonkish thing but a lot of it depends on how you're holding your account. So, if you hold your account in a brokerage structure, sort of Vanguard brokerage for example and you have couple individual securities and you have your ETF’s, it’s actually easier for people, from an accounting standpoint, at tax standpoint, perhaps use the ETF. If you're just a fund holder and you don’t have individual securities and you don’t have a brokerage account, then the fund structure ends up being easier and more compelling. Eric Schurenberg: Okay. It makes sense. These ETF’s, these new ETF’s track index, say track for example, growth index is an international index so on and so forth, real estate index but you also have actively managed funds at Vanguard that cover the same things. When you're trying to make the decision between active versus passive investing, what should you be taking? Bill Mc-Nabb: So, the most important thing from our prospective in investing in general is you want to be low-cost and highly diversified. And so, our active funds are also very low-cost and very highly diversified. You can never go wrong just selecting an all index lineup. It’s the simplest most efficient way to put an asset allocation strategy in place. Some investors though are looking or hoping, if you will, for a little outperformance. And we think our active funds because of the quality of our managers and the very low-cost structure that they have had a better chance of doing that than others. But it’s by no means a sure thing. Active management is a very tough game. And so, we see a lot of investors who like to combine it to. They’ll index their core and then they’ll add some active to try to get a little bit of extra performance. But for somebody who just is looking for the simplest solution, this trade index lineup is a great way to go because it’s so efficient. Eric Schurenberg: Bill, thanks for joining us. Bill Mc-Nabb: It was a privilege thank you. Eric Schurenberg: And thanks for watching.