Hougan: Is there room for smart beta in the Vanguard portfolio?
Buckley: In November, we announced a suite of actively managed factor ETFs, our first such offering. But please don’t call them smart beta. While we’re in the quiet period and I cannot discuss specifics, the ETF suite comprises five factor exposures: minimum volatility, value, momentum, liquidity, and quality. A sixth fund and ETF will offer a multifactor approach. Our internal quant team, which has more than 30 years of experience, will employ a rules-based approach.
We believe factor-based investing is just another form of active management, and roughly 25% of our assets under management are in active funds. And we’ve long believed in active—low cost, long-term and disciplined active.
One aspect of factor investing we try to communicate to investors is that the strategies aren’t for the faint of heart. Performance is highly cyclical and typically inconsistent across different economic and market conditions. Investors must be able to endure potentially extended periods of underperformance relative to the broad market.
Hougan: Why is Vanguard launching active ETFs now, and why has it taken so long?
Buckley: Vanguard has always taken a careful, deliberate approach to new product development. The funds we’ve elected to introduce are only those that met the Vanguard standard of exhaustive analysis and evaluation of their ability to benefit investment portfolios. We don’t experiment with our clients’ money. The other extenuating factor was getting SEC approval of an actively managed ETF.
We have experience managing factor funds, introducing a minimum-volatility fund in the U.S. in 2013. We also introduced factor products in Canada and the U.K. within the past two years. We’ve developed these new products for advisors and institutional investors, who we believe understand the risks and have the best opportunity to add value to their portfolios by employing these tools.
Hougan: Do your active managers worry about front-running in an ETF structure?
Buckley: Not for our factor funds. Vanguard’s position on portfolio holdings disclosures hasn’t changed. We still believe daily portfolio holdings disclosure for index and traditional active funds is generally not in a shareholder’s best interest.
However, the SEC has made it clear they view transparency as important to any actively managed ETF application. In fact, they’ve yet to approve an actively managed ETF that doesn’t disclose its portfolio holdings on a daily basis.
That’s why we’re only considering active ETFs that follow certain strategies—generally, high-capacity, model-driven strategies with trading flexibility—that can accommodate daily portfolio holdings disclosures.
Hougan: What do you worry about?
Buckley: Cybersecurity is of the utmost importance to me—even more so in my new role. It’s a topic that’s always top of mind for us.
Understandably, many Americans have concerns about the safety and security of their assets and personal information. More and more, we’re all reading horror stories in the news and bracing for the next data breach. It can be a scary time for many of us. I was Vanguard’s chief information officer when the subject of cybersecurity really started to take off more than a decade ago. It’s stunning how it’s advanced and how the threat has increased.
We are making a high investment in securing our clients’ data and assets. We follow industry best practices, employing state-of-the-art technology and rigorous online security standards. We also provide clients additional layers of protection through a number of secondary safeguards. An organization should never believe they’re immune to an attack. Constant review and preparation should be of supreme importance for all companies.
Hougan: What does Vanguard look like five years from now?
Buckley: I would say that, five years from now, investors should feel continued comfort in knowing that core beliefs and practices remain intact. Our mutual structure, our investment principles, our client-focused culture, and our commitment to our crew will never change. Our fundamental mission of giving our investors the best chance for investment success will not change.
But, how we do it and where we do it will change. If you work at Vanguard, you understand that there’s no place for complacency in our DNA. We’re driven to improve the value we offer. For us, it’s more exciting to think of the potential of tomorrow than to celebrate the success of today.