Vanguard’s Gus Sauter calls for responsible ETF innovation

Jan 31st, 2012 | By | Category: Equities

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Vanguard Chief Investment Officer Gus Sauter challenged the ETF industry to be responsible in developing new products and called for greater efforts to educate investors about ETFs.

Vanguard CIO calls for responsible ETF product development

Vanguard CIO Gus Sauter (right) challenged the ETF industry to be responsible in developing new products and called for greater efforts to educate investors about ETFs.

During a speech at the recent IndexUniverse “Inside ETFs” conference, Sauter said the ETF industry has been characterised by “growth and innovation.”

From 2000 to 2010, assets in ETFs grew by about 30% per year. By comparison, traditional mutual funds grew by about 5% annually over the same time.  Globally, ETFs now hold roughly $1.5 trillion in investor assets.

Sauter said that the rapid growth of ETFs has been largely good news for investors, providing them with greater access to diversified, low-cost index funds, as well as for advisers, providing them with simple, flexible investment tools for building well-constructed portfolios for their clients.

However, Sauter noted that ETFs have been blamed for a wide range of problems, from creating the May 2010 Flash Crash to contributing to ongoing market volatility. In rebutting the criticism, Sauter compared the volatility of the US stock market to that of the German stock market. “ETFs are much more dominant in the US market than in Germany, but market volatility in each has been the same—exactly the same,” he said.

Sauter encouraged ETF providers and investment advisers to play the role of an educator when it comes to ETFs. “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,” he said.

The Vanguard CIO also discussed the concept of “adviser’s alpha.”

Traditionally, the value proposition for many advisers has been based on their investment acumen and prospects for delivering higher returns than those of the markets. But, said Sauter, no matter how skilled the adviser, the path to better investment results may not lie with the ability to pick investments or strategies.

Instead, he suggests advisers 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 adviser provides is far more valuable than a buy, sell, or hold call,” said Sauter.

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