Brennan: ETFs Gave Advisors Missing Tools

January 08, 2013

Vanguard’s chairman emeritus reflects on the short but profound history of exchange-traded funds and how it changed the advisory industry.

Jack Brennan served as chief executive officer of Vanguard Group from 1996 to 2008, and added the title of chairman in 1998 when Vanguard founder John Bogle retired. He began his Vanguard career working closely with Bogle as assistant to the chairman, and now retains an office at the company’s Valley Forge, Pa. headquarters, holding the title of chairman emeritus. During his tenure, Brennan guided Vanguard’s rise from renegade indexing pioneer to the biggest mutual fund company in the world, with more than $2 trillion in assets under management. Brennan remains an in-house resource for Vanguard’s senior management, and is a featured speaker at IndexUniverse’s Inside ETFs conference Feb. 10-12 in Hollywood, Fla.

IndexUniverse: Let’s start off with talking about the history of Vanguard with ETFs. Vanguard was initially hesitant to embrace ETFs, right? Can you tell us a little bit about how that changed?

Jack Brennan: I don’t think "hesitancy" is quite right. We didn’t feel pressed to jump into the ETF business. But it was clear to us, a decade ago, that this was something that could and should both enhance the visibility and the credibility of indexing broadly, where we’re the dominant force in the mutual fund space.

We weren’t totally sure about the relevance and pertinence to our clientele. But we said, “Let’s experiment,” which is the way Vanguard starts a lot of things. Then, at the same time, we said, “We think there's a better structure for these products.” And, as I think you're probably familiar, we have a patented structure. Vanguard’s ETFs are a share class of our existing index funds, which allowed us to launch the funds with scale and lower cost than most people could, as a matter of course. So the startup was slower. It’s always slower than you would hope. But in our case, the structure has turned out to be a great boon for us, in terms of the ability to get the business ramped up pretty quickly.

But I think it’s clear that we didn’t foresee how rapid and extensive the adoption curve would be. We thought it could be a good business. We didn’t—at least I didn’t—see just how extensive and how important it could be to Vanguard in a pretty short period of time.

A lot of it is great execution. In my view, the ETF is a great innovation. And the advisor community and the institutional community have seen that and adopted it quicker than I expected.

IU: In retrospect, what was so attractive about ETFs?

Brennan: First, parallel to the ETF explosion, if you will, was a relatively rapid change in the thoughts about the advisor-value proposition. Where is the advisor’s value? Is it in picking between Cisco and Intel today? Or is it picking between large-cap, growth-fund A or large-cap, growth-fund B? I don’t think so.

What’s happened is the value proposition of the advisor has gone up a level to strategy, such as helping people really do planning and helping people manage those plans and stay on that plan, rather than the small tactics of selection here or selection there. ETF fits beautifully into that. If your value added is that strategy, the tool is the ETF. That combination of a fabulous new tool in ETFs and the advisor’s change to an asset-based fee structure is a great explanation for the change.


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