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Investing in ETF or Mutual Fund

Scott Burns: ETF or Mutual Fund? The question is does it matter to Vanguard?

Hi there, I’m Scott Burns Director of ETF Research with

Morningstar. Joining me right now is Rick Genoni who is the head

of Vanguard’s ETF business.

So Rick, outside of your own personal disposition toward ETF’s, I

think a lot of viewers out there are confused or just wonder Does

Vanguard care whether someone buys the mutual fund version of a

fund or the ETF share version of the fund?

Rick Genoni: I think we certainly care because there’s a right product for each

client based on the strategy that they’re looking to implement in the

marketplace. ETFs are not the right answer for every client. Mutual

funds are not the right answer for every client.

It really differs based on how much time they’re going to hold the

product, how much money they’re putting into the marketplace,

what strategy they’re using. Vanguard does care, but broadly we

view ETF’s as simply a way to package the great indexing prowess

that we bring to the marketplace.

It allows us to tap into the adviser marketplace and offer a great

solution to the adviser marketplace.

Scott Burns: Have you seen any cannibalization at all with the ETF product? Is

there swapping or cannibalization?

Rick Genoni: I think industry-wide, ETF’s haven taken share from index mutual

funds. We haven’t seen that with our own funds. Broadly, I think

most of the cash flow going into ETF’s is coming from actively

managed funds and from single stocks.

Clients are using single stocks. They are looking for a little bit

broader coverage of the market without that single stock risk.

Certainly, active managers have had trouble in the past couple of

years.

Indexing, overall is gaining popularity with clients. But again,

ETF’s are just another way that we use to package our current

indexed products and get them into the marketplace.

Scott Burns: Are you starting to see adoption of your ETF products by

institutional clients? I think more investing. I always like to

describe ETF’s as in the sixth inning as trading vehicles, but

really in the first inning as investment vehicles. Included in that

would be pension funds and endowments. I’m sure there are other

folks that invest across the Vanguard platform. Are you seeing any

switching there or adoption?

Rick Genoni: We’re certainly seeing use of our ETF’s by both retail and what I’ll

call institutional clients being the hedge funds and the asset

managers. There are certainly some strategies that the institutional

marketplace uses with ETF’s like equitizing cash, taking small

sector bets.

They’re a great tool to jump in and out of the marketplace. ETF

cash flow coming into a fund doesn’t cause transaction costs on the

fund overall whereas cash flow coming into a mutual fund does.

When a client is actively trading ETF’s, it doesn’t have a negative

impact on the overall fund. It is actually a very positive thing when

we see institutional clients actively trading ETF’s because all it

does is increase the volume over all in the ETF which makes the

execution costs for the retail client even better.

Scott Burns: We discussed earlier or you discussed earlier that an ETF isn’t

always right or a mutual fund isn’t always right. When is an ETF

right for an investor?

Rick Genoni: One of the big differences is cost. Certainly ETF’s tend to be

slightly lower cost than most mutual funds. All that said, again,

you have to think about some of the other fees like bid ask spreads,