F. William McNabb III is chairman and CEO of Vanguard. He joined Vanguard in 1986, became CEO in 2008, and chairman of the board of directors and the board of trustees in 2010. Previously, McNabb led each of Vanguard’s client-facing business divisions. He is active in the investment management industry and serves as chairman of the Investment Company Institute. McNabb will be a keynote speaker at ETF.com’s Inside ETFs conference Jan. 24-27, 2016 in Florida.
ETF.com: What advice do you have for advisors going into 2016? What can they be better at, or maybe, what should they not be doing?
Bill McNabb: The financial advice business is going through a period of rapid change. With the rise of the robos—among other factors—I believe advisors who are in the best position to succeed in the future are doing two key things.
First, they’re telling their story well. They’re showing clients how they add value by providing holistic wealth management, not by picking individual stocks or ETFs. Advisors can use this moment as an opportunity to differentiate the services they provide.
Automated systems can meet certain investor needs, but they can’t meet all investor needs. They can’t necessarily act as an emotional circuit breaker, convincing clients not to make rash decisions driven by market volatility—decisions that may not be in their best interests.
Second, advisors who will succeed in the future are continuing to adapt and evolve. In particular, advisors should continue to use technology and redefine their value proposition to investors. Much has been made about what the rise of robo advice means for advisors.
But the technology behind the robos really isn’t that different from the technology many advisors already incorporate in their practice and are using for everything from portfolio construction to back-office functions. The best advisors are thinking about ways to improve their offer while remaining true to the essence of their practice.
ETF.com: Vanguard broke from the pack this year and began including China A-shares into its emerging markets ETF, the Vanguard FTSE Emerging Markets (VWO | C-88). Was there any pause for concern during the tumultuous summer meltdown in China stocks? And how is that transition going?
McNabb: No, we’re committed to adding China A-shares, and view it as a long-term investment that’s completely independent of short-term market conditions. We’re proceeding with our plans and will maintain our deliberative approach.
The Vanguard Emerging Markets Stock Index Fund began tracking a new transition index in November. Over a period of approximately one year, the transition index will build exposure to small-capitalization stocks and China A-shares. At the end of the transition, the fund will track its new target index.
We continue to believe this is the right move for investors. China is one of the world’s key emerging economies. With the world’s second-largest GDP, China accounts for 11% of global trade and 8% of global consumption.
Finally, I would add that inclusions or exclusions of individual securities or countries in an index are not based on valuations. Rather, they are based on the available and appropriate opportunity set.
ETF.com: Vanguard had one ETF launch this year, your first muni bond ETF, the Vanguard Tax-Exempt Bond (VTEB). Why muni bonds now? And why only one launch? Do you feel you have the investable universe pretty well covered?
McNabb: Vanguard has long offered low-cost, tax-exempt bond funds that are actively managed. The new municipal fund gives the additional choice of an index fund and provides a low-cost ETF to our advisor clients.
We’ve always taken a very careful and thoughtful approach to product development. We’ll only come out with a product if there’s a solid investment case that can be made for it. You won’t see us launch products to capitalize on a trend or investors’ latest fancies.
Including our new muni ETF, we now offer 68 ETFs. We believe we have the basics pretty well covered. However, we’re always evaluating our fund lineup. To that end, we filed for two dividend-oriented international index funds and ETFs in September.
ETF.com: What surprised you in the ETF industry this year?
McNabb: I was surprised that some people, particularly those in the media, suspected ETFs as having caused the market volatility in August. The volatility was a result of the convergence of macroeconomic events and market structure issues. In aggregate, these issues exacerbated trading difficulties.
What August pointed out was the need to fine-tune market structure. To that end, we’re working closely with our industry partners, regulators and other market participants to investigate trading issues.
ETF.com: USAA told me they were in discussion with Vanguard regarding adopting your patented share class structure. How frequently do you license that out, and are you seeing more demand for it as mutual fund companies begin to jump into the ETF pool?
McNabb: While we believe there are inherent advantages to our share class structure, our goal has been to facilitate rather than limit its use. We’ve had some high-level discussions, but nothing I can really elaborate on.
ETF.com: What do you see from Europe and Asia in terms of ETF adoption? Who is buying (retail versus advisor versus institutional)? How bullish are you on those regions, and what are the big impediments to ETFs growing faster in those parts of the world?
McNabb: There’s a tremendous amount of interest in ETFs globally, particularly from financial advisors who use broad-based ETFs to build sound, balanced portfolios for their clients. The underlying story, however, is that ETFs are introducing more and more people to low-cost index investing. Investors are increasingly recognizing the negative impact of high fees on long-term returns. ETFs offer an accessible and flexible way for all types of investors to index.
We like to consider the growth of ETFs with a comparison to telephones. Index mutual funds are akin to landline telephones and ETFs to wireless or cellphones. In some emerging countries with low landline coverage, they bypassed the landline stage altogether and proceeded directly to cellphones.
In countries like Canada, where high-cost, actively managed funds have dominated, and the concept of indexing is just gaining hold, the market has jumped right to ETFs for that indexing exposure.
ETF.com Can you give us any type of news or anything we can expect in 2016 from Vanguard?
McNabb: We like to say we've been lowering the cost and complexity of investing for more than 40 years. That’s always our goal. Other investment firms may talk about lower costs on a small subset of funds or have a separate brand of low-cost products as a business strategy to attract assets. Looking ahead, we’ll continue to provide the highest value possible to our clients.
For advisors, a big focus will be on tools and technology. We recently launched the Client Resource Center. The service is free and offers online tools, coaching and other resources that can help advisors create more compelling client communications, conduct more effective client meetings, and boost client acquisition and retention efforts. It’s a great example of what our advisor clients can expect from us going forward.
Contact Drew Voros at email@example.com.
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