The future of the ETF brand
Ron O'Hanley: Tim, thanks for joining me today. Vanguard has been a true pioneer in ETFs, particularly in its application for individual investors. The democratisation of ETFs and the fact that so many individual investors now are participants in the ETF market, I think can be rightfully credited to Vanguard so it’s terrific to have you here. Can you tell us how ETFs have shaped Vanguard?
Tim Buckley: Well, ETFs for us, Ron, have been another way to access investors with indexing in so many ways. So Vanguard was an early pioneer, Jack Bogle with indexing, and we served a lot of investors directly, either directly or through a 401k. Well, the ETF allowed us to actually start serving those clients that would be coming through an RIA or through a broker dealer, and to actually bring indexing to them. So the ETF has been just a great vehicle, a great means of distributing indexing to a whole new audience.
Ron O'Hanley: And certainly that's evident everywhere. You really can't, it's hardly anybody I can talk to who doesn't own a Vanguard ETF.
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text: Challenges facing the ETF industry
Ron O'Hanley: As you think about this 30th anniversary of the ETF, what are the challenges that the ETF industry is facing?
Tim Buckley: The biggest one is probably brand, that the traditional brand of the ETF is eroding. Ron, you and I know that the traditional brand of the ETF, as it grew up, it was always known to be low cost, tax efficient, well diversified. It was synonymous with indexing, and it built up a trust around that. Well, now not every ETF is an index, and we have new forms of ETFs and some of them belong in long term portfolios and others, well, they're more speculative. You end up with crypto ETFs or single stock ETFs or levered ETFs. And so there's a little bit more work on the investor, on that client to put together a portfolio and figure out, well, if I can't just think about an ETF is suitable from our portfolio I've got to do the work behind the scenes and it'll be a little heavier lifting for investors.
Ron O'Hanley: That's an interesting perspective, Tim, because there is a whole lot of trust that the investor and the registered investment advisor in particular have in ETFs.
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text: Active management and ETFs
Ron O'Hanley: Where do you see active management fitting in ETFs?
Tim Buckley: Ron, I love seeing active management starting to grow through ETFs, because ETF is this great building block for a portfolio. And you and I know that it can be used for tax loss harvesting. It tends to be more tax efficient in that sense that when money flows in, flows out of an ETF, well, the underlying shareholders who remain are often insulated and protected of that money going in and out. Well, now active management can take advantage of the ETF structure. And we're seeing growth there. My one caution would be that it isn't for all active strategies. The active strategy has to have sufficient capacity. Because an ETF still, you can't close an ETF, so let's make sure you have plenty of runway with your excess return.
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text: The future of ETFs
Ron O'Hanley: As you think about the future of ETFs, Tim, what do you think is the most important dimension in the future? Is it innovation? Is it education? Is it distribution? Something else?
Tim Buckley: Ron, I’d go with education of that choice there. As much as I'd love to say innovation, the innovation has occurred. And it has been, if you think about the ETF, it belongs in the pantheon of great innovative products in this industry. Put it with the money market, put it with indexing or the target date fund. The ETF stands right with those. The fact, Ron, that you actually can hold a globally diversified portfolio for seven basis points and not pay anything to buy that. I mean, that is, that's incredible innovation, right there. And so it moves towards education. Are we using the ETF in the right way in a portfolio? How are we building portfolios? The more the clients understand that, the better off they'll be. But there is innovation that may help them there. So if you put another choice out there, it might be innovation in advice. In advice, the use of technology, and we could start going down the path of generative AI, but that's probably for another segment we could do. But if you think about advice, where it's going, lowering cost, higher quality, using technology, but the building blocks will be ETFs. That will be the core of people's portfolios as we move towards a more advised world, a more automated world.
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text: The next big thing in ETFs
Ron O'Hanley: Well, if I could pick up on that, Tim, those thoughts there, as you think about the future of ETFs, what's the next big thing? Where might it come from?
Tim Buckley: Well, old is new, if you will. Fixed income, one of the oldest asset classes out there, it will drive the growth of ETFs in the next decade. And we know that fixed income belongs in most long-term portfolios. We already talked about the ETF is a good building block for portfolios, but yet the penetration of fixed income into the ETF structure has lagged way behind equities. It's probably a decade behind. In fact, equity penetration to ETFs is 50% more than that of fixed income. So we expect in the next decade for fixed income to start to close that gap and make it into ETF form and make it into client portfolios.
Ron O'Hanley: It's a very investor-friendly kind of structure, so I would agree with that. Tim, it's been great talking to you today. Vanguard is truly an outstanding firm and its commitment to the individual investor is unparalleled. It's really helpful to hear how you and Vanguard are thinking about ETFs, both in terms of what's occurred in your past and more importantly, as you think about the future. So thanks very much.
Tim Buckley: You bet Ron, and there is a great future ahead for ETFs. And we expect it to penetrate further into client portfolios because it is a great structure for an advised portfolio, and typically it is lower cost. And the lower those costs, the more of your return you get to keep.
Ron O'Hanley: Absolutely.
State Street Chairman and CEO Ron O’Hanley sits down with Vanguard Chairman and CEO Tim Buckley to assess the challenges ETFs are now facing when it comes to branding, as well as the need for improved education in the rapidly evolving space.
Vanguard was instrumental in bringing ETFs to the mass market by driving expansion through retail and advisor channels, and was an early pioneer with indexing. Today, Vanguard is one of the largest providers of ETFs in the world.
Buckley explains why he believes the traditional ETF brand is eroded, and how investors will need to do more heavy lifting to determine which ETFs are suitable for their portfolios. With ETFs now serving as an essential building block, Buckley also remarks on how fixed income ꟷ one of the oldest asset classes ꟷ will drive the growth of ETFs in the next decade.
Celebrating 30 years of ETF innovation
2023 marks the 30th anniversary of the launch of the industry’s first US-listed exchange-traded fund. Co-created by State Street Global Advisors, the Standard & Poor’s Depositary Receipts ꟷ better known as the SPDR® S&P 500® ETF, or SPY ꟷ revolutionized index investing, liquidity, asset allocation, intermediary distribution, portfolio construction and overall market access.
Today, among the nearly 12,0001 ETFs in existence, SPY is the largest2, most liquid3 and most heavily traded4 ETF in the world. Our ETF@30 video series examines the past, present and future of ETFs ꟷ and their impact on the world’s financial markets and industries.
1 ETFGI Global ETF & ETP Insights May 2023 report
2 Bloomberg Finance L.P., as of December 12, 2022
3 Bloomberg Finance L.P., as of December 12, 2022
4 Bloomberg Finance L.P., as of December 12, 2022
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