In this 10-minute podcast, Dickson, Vanguard’s global head of Investment Research and Development, provides insights from his panel on the future of ETFs and discusses the issues attendees were most concerned about on the conference floor.


Paula Fuchsberg: The tenth annual Inside ETFs conference recently brought together more than 2,000 financial advisors and ETF strategists to talk about trends, tactics, and all manner of timely topics involving ETFs. I’m Paula Fuchsberg, and welcome to Vanguard’s Investment Commentary Podcast series.

In this month’s episode, which we’re recording on February 14, 2017, we’ll get the inside scoop on Inside ETFs from a key participant—namely, Joel Dickson, Vanguard’s global head of Investment Research and Development and a principal in Vanguard Investment Strategy Group. Welcome, Joel.

Joel Dickson: Thanks for having me.

Paula Fuchsberg: Joel, you’ve attended and spoken several times at Inside ETFs, which is the world’s largest ETF conference. What did the size and focus and mood of this year’s event tell you about the state of the ETF industry today?

Joel Dickson: Certainly, the ETF industry continues to grow. One of the good things about the conference, even though at times it can be like the ETF industry patting itself on the back a little bit too much, but it is a good group for getting everyone together in terms of clients, in terms of the partners that we rely on—like, for example, market makers and other providers, index providers, and so forth—that are all part of the ETF ecosystem. We meet with clients and our business partners all the time, but it’s good to be able to get together with them all in one place and actually facilitate some business being done.

The other thing that I would say really struck me about the size of the conference this year was there were a lot of new folks, people that we haven’t run into as regularly, and, you know, it’s the new entrants to the ETF market. As they’ve seen the growth and the development of the marketplace, you’re seeing a lot of new entrants, whether they be small startup asset managers trying to launch just a couple of ETFs and find their niche in the marketplace, or established traditional mutual fund managers trying to find another distribution channel for their active strategies through ETFs.

Paula Fuchsberg: So with all the growth in ETF assets, there must be a lot of conversation about where ETFs are going; and, in fact, you spoke on a panel about the future of ETFs. So what do you see as the future?

Joel Dickson: Yeah, I think there’s a transition point that has occurred in terms of where we’re headed in the ETF space. Go to this same conference four or five years ago, and the discussion was more around: What are ETFs? Now it’s much more: How do you use them to build portfolios to meet client and investor needs, in order to help them succeed in meeting their goals?

So it’s very much more about ETFs as a vehicle, not as a strategy. There was a lot of discussion about the investment landscape and how do you then use ETFs to affect your investment approach. Sometimes I hear, “Well, do you have an ETF in your portfolio?” as if it’s a separate asset class like stocks or bonds. It’s not. It’s a vehicle for an investment strategy, and how you then use those and build portfolios was much more the focus this year and going forward will be.

Paula Fuchsberg: And I understand that the status and role of active management as a strategy drew a lot of attention at the conference. What can you tell us about that in terms of the evolution of ETFs?

Joel Dickson: Well, I think one of the big things is, in many ways, this whole delineation between active and passive has lost its meaning, generally. It’s a real difference between product discussion and portfolio implementation. At the product level, there might be an active fund—stock selection, for example—or there might be a passive fund—a market-cap-weighted portfolio for accessing a market like European equities or emerging markets or fixed income.

What’s striking about, though, the difference between the product and the portfolio is that, at the end of the day, most people use these strategies to have some active view that is different than, just say, the broad overall market. Maybe it’s because of their risk preferences or time horizon or a particular home bias that they might have for their portfolio, but at other times it’s for trying to outperform. And what we’re seeing is this confluence of active and passive just kind of colliding.

We see it in the form of smart beta, where what you often are doing is taking an active strategy, creating an index out of it, and then tracking it. So it’s an index fund, but the underlying strategy is very active.

Or what you’re seeing are people using market-cap-weighted, what we would call traditional passive/indexed, vehicles to express active views. For example, if you like European equities, people might use a Europe ETF market-cap-weighted to overweight Europe in their total portfolio.

So this whole active/passive combination has come together in a way that I think when we just talk about Is it active or is it passive? is losing all of that nuance in actually how they’re being used.

Paula Fuchsberg: So what did you mean by a comment that you made at the conference that if and when ETFs exceed mutual funds in their assets, it won’t be because of indexing but because of active?

Joel Dickson: Yeah, in many ways, I think what we’ve seen with the growth of ETFs—and, by the way, index mutual funds that have also grown over the last several years—people want to attribute it to some sort of major takeover of passive management or of everyone going to index approaches. And while I think some of the characteristics have been there—that is, low-cost, broad diversification—I do think there’s some element of high-cost active strategies being, in essence, dead and being replaced by lower-cost approaches.

But active management hasn’t gone away, and it’s not going to go away. It’s evolved. And I mentioned smart beta before. The use of passive market-cap-weighted ETFs to provide a view is another way that you’re seeing passive approaches being used to implement active use.

At the end of the day, you’re seeing a lot of different active approaches. But now, with ETFs and the product development that has occurred, you can use ETFs to express these views in a more efficient way than you could several years ago. And so that comment about the growth of the ETF industry and if and when the assets pass mutual funds, it will be due in large part to active, it’s just a reflection that at the end of the day, most people have some sort of active approach that they’re looking at in their portfolio.

Paula Fuchsberg: So amid all these changes and approaches and growth in ETFs, what stood out for you among questions and concerns that you heard from advisors at the conference?

Joel Dickson: Well, I think, there’s the constant drumbeat of, hey, what’s the current outlook? What could we expect over the course of the next 6, 12 months? And this is where, as a Vanguard participant in the conference, I feel a bit like a fish out of water because we’re always talking about try to ignore the short-term noise in the market; focus on the things that are most important—how much you’re saving, what’s your overall asset allocation, minimize costs. And there’s always going to be noise and volatility in the marketplace, but you really should only change the portfolio and your objectives when you see a change in your own life events or life situation. Those are the times to take a big look at the portfolio.

So I understand the interest. We always want to know, hey, what might perform the best over the course of the next 12 months, but a lot of times that ends up being a lot of storytelling as opposed to a real confident analysis of what actually will happen.

Paula Fuchsberg: Speaking of which, what about the potential impact of the changing political and policy environment? That must have been on a lot of people’s minds.

Joel Dickson: Oh, it most definitely was. And, in many ways, there was a lot of discussion about what the “black swan” event potential in 2017 might be. And there was a lot of concern about comments from the administration on particular aspects of policy or the industry, which could change how the market outlook is occurring. And we’re already starting to see that a little bit with some discussion about regulatory modifications, whether it might be some relook at Dodd-Frank regulations or a delay in the DOL [U.S. Department of Labor] fiduciary rule.

I think there’s always the implications that might result any time there’s a new administration. In some ways, there’s nothing unique about this change in administration—there are always policy differences with new administrations that you’re trying to figure out what that might mean for investors.

Paula Fuchsberg: And where does the investor fit in with all of this? And for advisors who weren’t at the conference, what are the most important takeaways they should be sharing with investors?

Joel Dickson: One of the other things that was striking—and actually was discussed at some length at the conference—was the old adage and issue that you could have sort of the best, lowest-cost, most efficient products available to investors and they may not always get used the right way. This is why we refer to one of the biggest potential value-adds as an advisor in the work that we’ve done at Vanguard with our Advisor’s Alpha discussions and research that the behavioral coaching piece can add a lot of value in an advisory relationship.

Because left to their own devices, investors tend to do things like chase performance, look at performance and not consider fees as much as maybe they should. And that sort of behavior that has been consistent over time—and oh, by the way, we’re seeing some of that same behavior with ETFs—tends to be the biggest hurdle for investors’ long-term investment success. It’s that getting caught up in the short-term noise.

Paula Fuchsberg: Well, that sounds like a good point on which to wrap up our discussion. Joel, thank you so much for sharing your insights.

Joel Dickson: It’s great being here, Paula.

Paula Fuchsberg: And we hope you’ve enjoyed this Vanguard Investment Commentary Podcast. Be sure to check back with us each month for more insights on the markets and investing. And, remember, you can always follow us on Twitter and LinkedIn or visit our website at any time. Thanks for listening.


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