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Rebecca Katz: Good evening, and welcome to this live Vanguard webcast. I’m Rebecca Katz, and happy new year to you. Can’t believe it’s 2018. We wish you lots of good fortune and good health in this new year. And with the new year brings with it our new CEO, Tim Buckley, and our new Chief Investment Officer, Greg Davis, who join me here in the studio. And today we will be exploring on this webcast their expectations for the markets, for the economy, the impact of the new tax legislation, what’s next for Vanguard in 2018, and anything else that is on your mind because, as you know, these webcasts are about your questions. Many of you submitted questions already when you registered, but keep those questions coming. I like to keep them in the hot seat and send them some live questions. They’re so thrilled. But we would like to get through as many questions as we possibly can because it has been quite an exciting ride leading up to this year. Wow! The markets today were quite incredible, and we’ll be spending some time talking about that too.

So, Tim, Greg, thanks so much for being here for kicking off the new year with us.

Greg Davis: Great to be with you.

Tim Buckley: You bet, and happy new year to all our clients, and we’re thrilled they’re spending some time with us this evening.

Rebecca Katz: Great. Well, as you know from doing these with me over the years, we like to kind of take the pulse of our investors so we’re going to ask them a polling question. I will point out that as you’re watching this webcast if you have any technical difficulties, you should see on your screens some little icons or widgets. There’s a blue one for technical help. Just click that and someone live will help you fix your technical problems. And there’s a green little button or widget, and that has a lot of great resources that you can read after the webcast or during the webcast where you can find the Vanguard economic and market outlook for 2018 that was just published a few weeks ago and also links back to other webcasts that we’ve done.

So now for you, the interactive part, we like to ask you our first polling question which is really what’s your sentiment? How are you feeling about the prospects for the economy in 2018? Are you optimistic, pessimistic, or uncertain? We ask this all the time, and it’s interesting to see how things change over the years. So vote now, and I’ll be right back with those responses after we ask the team a few questions.

So, thanks again. Why don’t we just jump into what has been on the headlines all day. The equity markets set new records today. We have a question from John in Fairfield, Connecticut, who just says, “What’s your outlook for equity investments in 2018? Will this party end?” So, Greg, as our chief investment officer, that’s yours.

Greg Davis: Sure. So, I mean, we typically don’t think about the equity market and investing in equities on a one-year basis. It’s very difficult to predict what’s going to happen in the short-run.

When we think about longer-term equity market returns on a global basis, we’re expecting somewhere in the neighborhood of 4.5% to 6.5% global equity market returns over a 10-year time horizon on an annualized basis. If we’re to look at the domestic market, we’re thinking in a 3% to 5% type of range just because starting valuations are a bit elevated relative to where they’ve been historically. So, if you take that into consideration, plus where we are in terms of the economic cycle, we’re expecting lower equity market returns relative to the historical average.

Rebecca Katz: Yes, that seems like that would feel a lot different. What have we been averaging, about 8%?

Greg Davis: North of 10%, right. And then, you know, in terms of when the party will end, I mean no one knows when the party will end. What we would say is that we should be on the lookout for certain things. Things such as are we starting to see a big pickup in terms of inflation, and will that cause the Federal Reserve and the global central banks to start taking away some of their accommodation when it comes to monetary policy? That would be a warning sign that the party could be coming to an end. And then other things like China. If we start to see things in China start to flare up again about concerns about growth in China, that would be another one of those factors that could cause pressure in the equity markets globally.

Rebecca Katz: Okay. Well we do have, I’m sure, a lot of questions around how to time the markets, when to get in, when to get out; things like that. So, Steve in Tupper Lake, New York, for example, said, “If there’s going to be a major adjustment in the market,” which you didn’t mention, but if there was one and we were going to expect it, “should we move out of stocks in early 2018?” So, I guess, two questions. Do we expect an actual big correction, and how do you avoid that?

Tim Buckley: Well, I guess my lesson for Steve would be in 26 years I’ve learned that market timing is a fool’s errand. Greg made a great case for why, look, equites are stretched in their valuations, and, you know, a rational person would think, hey, they’re stretched, there’s likely to be a pullback, I should get out now.

You also have to remember that markets and investors can remain irrational for long periods of time. And the other thing is you don’t necessarily have to have a pullback to get valuations back in place. We actually can have markets with low returns. If we have low returns and decent earnings growth by companies, that would get price/earnings (PE) multiples back in line over time, so you don’t necessarily have to have a pullback.

But let’s say Steve got it right, and he said, “I’m going to go into cash.” And he pulled back and he pulled into cash and the market went down 20%. The next thing Steve has to do is know when to get back in the market. And markets are fairly punchy. They get all the return on a couple of days, and so you have to know when to get back in. So now is the tough part. You don’t know, do I get back in right after or is there another turn coming? It’s too hard. It is just too hard to get that timing right and I’ve yet to meet the investor who actually can time it perfectly. And that’s why we talk about diversification, and you hear us say it time and again, “diversification.”

You have diversification for just these times. Right, Greg? If we knew that you weren’t going to get a pullback in the markets, we’d tell you 100% equities, right? If you’re going to have a nice equity market, why be diversified? But we never know when those pullbacks are coming in the stock market, so you stay diversified and then when a pullback comes to the market, be ready, be courageous—it takes a little bit of courage to say, “I’m going to sell some of my bonds and actually buy into those equities.” And that’s the best thing you can do.

Rebecca Katz: I think the challenge is that there are people who have actually still been on the sidelines since the global financial crisis in 2008. And they’re thinking, well, now the markets are inflated, what do I do? When do I actually start moving back in and how best to do that? I don’t know if we have perspective on that.

Tim Buckley: I think what I would say is dollar-cost averaging. I certainly don’t want to be that investor who gets in at the top. And the academic studies would tell you, “Look, over long periods of time, you’re better off just putting all the money into the market in one fell swoop.” But that works on average for academics in the literature. But if you’re that person who’s out there in that tail that got in at the high, you’re not going to feel great about it.

So what we typically tell people, “You’ll probably feel better about it and it’ll be easier on you if you just find a regular period to get back into the market. Just decide you’re going to do it over 6 months, 12 months to get your target allocation, and just regularly buy into the market, and it’ll be a lot easier.”

Greg Davis: And then, again, making sure that you use balance and diversification, right, so and not just all equities, but making sure that you keep in line the amount of assets you have in the fixed income side of your portfolio as well.

Rebecca Katz: Right, and we’re going to come back to fixed income because I know we love fixed income and we don’t often get many questions about it with all these exciting stock market returns.

We do have the poll results in, so let’s see how our audience is feeling, and then maybe we can pivot from there. If they’re pessimistic, we can cheer them up. We asked, “Which of the following best describes your outlook for the economy in 2018?” And about half of our viewers said they were optimistic, glass half full. Only 6% pessimistic. Hurrah! But, unfortunately, 44% of people are really uncertain, which I guess doesn’t really surprise me considering the headlines that we see every day. What’s your reaction to that?

Greg Davis: It’s not surprising. I mean given, again, you know, there has been a lot of positive performance in the equity markets leading investors to believe that, hey, this trend can continue for some period of time. But, again, we still have a lot of uncertainty about what’s happening in terms of the global market whether or not it’s geopolitical risk, whether or not what the Federal Reserve is going to do in the U.S., and then just still uncertainly in terms of Washington, D.C. as well.

Rebecca Katz: So, actually, this pivots right to a great question from Rajiv in Massachusetts. And, Tim, I’ll throw this one to you. And Rajiv says, “Why is the stock market so sensitive to Fed and government events such as the Fed raising interest rates or Congress passing the new tax bill?” And some of it’s uncertainty, right, or the markets really just don’t like uncertainty?

Tim Buckley: Well, what I’d tell Rajiv is like the markets, why do we focus so much on Fed actions and tax policy? The Fed essentially determines, they have a direct influence on the cost of capital for companies and the rate at which they can borrow. And that can determine how easy it is for them to borrow and to grow. They can determine, hey, if they keep raising rates, that can start to slow down an economy. If they lower rates, it’s easier to borrow, that can stimulate an economy. And so, of course, we’re going to look at that because they have a direct influence on rates.

Tax policy, well, that influences how much we all get to spend as consumers. How much is government taking in taxes? What are they going to spend it on? How much are they going to leave for the consumer to actually go out and spend on the companies out there? And if there’s a lot of consumer spending, that’s usually good for all the equity markets out there. So we’ll look at both of those.

Now, does it increase volatility? Usually not. Why is that? Because markets are forward looking. Whether the bond market, the stock market, they try to anticipate what will come. And if you’re talking about Capitol Hill tax policy, I mean it’s not determined in a day, a week, months. This stuff is debated for a long period of time, so you kind of see it coming. And so it’s priced into the market.

And the same thing with Fed actions. The Fed has been very good with forward guidance. They actually react to data that we all have access to so the market will anticipate what the Fed’s going to do a year in advance. And the volatility will come in when say the Fed acts different from market expectations.

Rebecca Katz: I see.

Tim Buckley: It’s a rare event. But that’s where you’ll see volatility. And those can be big return days either positive or negative. The days that really matter for volatility is when the market and the Fed they don’t agree.

Rebecca Katz: And, Greg, what are we expecting the Fed to do in 2018?

Greg Davis: So what the market is pricing in right now is about two Fed rate hikes, although the Fed has talked about numerous times that they’re looking to hike rates three times in 2018, but the market’s not fully convinced that’s going to happen just given all the uncertainty in the economic environment.

The market’s also pricing in a grand total of about two and a half to three rate hikes over two years, which is well below what the Fed has been saying. They’re looking to hike two to three times this year, two to three more times next year, and we’re expecting somewhere in that ball park, three this year and potentially two or three next year. But it really depends on what’s happening in terms of the outlook for the economy, inflation expectations, unemployment rate, those types of factors, so we’ll have to wait and see.

Rebecca Katz: Okay, great. We’re going to come back. We have two questions on inflation that were sent in when people registered, so I do want to talk about that. But we do have a couple of questions that just came in. So, let’s see. John from Facebook asked this on our Facebook page and said, “How do you know if markets are overpriced?” You talked a little bit about P/E ratios. You might want to explain that just in case we have some newer investors, what do we mean by that and how do we know if they’re too expensive?

Greg Davis: P/E ratio, or the price/earnings ratio, it’s a way to look at, hey, how is the company valued relative to the earnings that that company is producing? And so, there’s a well-known study that looks at the cyclically adjusted P/E ratio which looks at that P/E over a long-term time horizon, over a ten-year period, to adjust for cyclicality that happens in the economy. And so, if you were to look solely at that number, it would show that the P/E ratios are very elevated relative to historical averages; somewhere in the neighborhood of 31 times relative to historical averages that have been closer to 20.

Now if you adjust the P/E ratios based upon where we are in terms of interest rates and inflation, we see that when you make that adjustment, equity P/E ratios are slightly elevated. They’re at the higher end of the valuation buy-in, but they’re not as extreme as what the normal cyclically adjusted P/E ratio would show. So, again, it would entail that investors be cautious, but it’s not a bubble-like scenario that we saw during the dot-com era.

Tim Buckley: And, Greg, why don’t you explain why does it matter? Why do I care about prevailing interest rates when I’m thinking about the price I’m paying for forward earnings?

Greg Davis: Right. So, I mean just think about an equity similar to a bond; it has a cash flow that is based on its earnings. And so, in an environment where you’re getting those earnings and interest rates are really low, that earning stream becomes more valuable. And in an environment where interest rates are much higher and you’re trying to discount all those cash flows over time to the present value, that earning stream is less valuable. So, in an environment where interest rates are unbelievably low around the globe, it’s not surprising that you have P/E ratios that are higher than they normally are.

Rebecca Katz: Right, I see. So that’s important if you were comparing say the tech bubble back in the mid-‘90s to today because the interest rate situation was very different then.

Greg Davis: Exactly.

Rebecca Katz: Okay, great. I want to stay with you for just a second, Greg, because there’s, obviously, different sectors in the market that are performing differently and, I guess, high earnings companies tend to be growth stocks. We have a question from John in Rollinsford, New Hampshire, who said, “Are growth stocks outperforming value stocks or vice versa?” So maybe you can talk a little bit about some of the different factors and which sectors are outperforming?

Greg Davis: So, yes, in terms of growth versus value, on a one-, three-, five- and ten-year basis, growth stocks have outperformed value. A lot of that is driven by large-cap growth stocks and primarily in the technology sector have really been a beneficiary because of the view of what’s been happening in terms of reform, tax reform, we’re talking about regulatory reform, and then, also, just tax policy. The changes in the tax policy were all expected to benefit some of these large-cap growth companies, so they’ve outperformed.

But one of the things that we’d point out is that when you look at the P/E ratios of growth companies, they’re at the highest levels that we’ve seen in 15 years, so investors, again, need to be cautious. And the one thing that you look at, if you go back over history, there are long periods of time where growth outperforms and there are long periods of time where value outperforms. And it’s very difficult to know what’s going to happen over the next year or couple years because there’s so much movement that happens between when one style of investing becomes in favor and out of favor.

Rebecca Katz: Okay, this is perfect because we just got a follow-up question from Joe (thanks Joe) who said, “Can you explain exactly what diversification means?” So, we were earlier talking about stocks and bonds I think but not explicitly. Here you’re talking about growth and value. So maybe a high-level perspective on how do you diversify a portfolio.

Tim Buckley: If you think about, diversification should be relative to what your goals are long run. But what you’re trying to do with diversification if I use—well, we’re Vanguard, let me use a sailing metaphor. With a ship, you’ve got your sails, and your sails are going to capture the wind and push you forward. You can have a lot of sail up, but if you don’t have any ballast in the keel, when that wind comes along, you’re going to go right over. When you get in volatile times in the seas, you’ll go right over, so what you need is you need some ballast. And think about bonds as the ballast and think about equities as your sails. So, if you think about, you have in a portfolio equities for growth, you have bonds to help weather the tough times.

Over the past 30 years, Greg, fair enough, they’ve actually provided a lot of growth, but we tend to think about bonds more as diversifiers than as your engines or your sails for growth, so you want to have a nice mix of stocks and bonds. But even within those, you have to be diversified. You don’t want everything concentrated in one area of the economy or one area of the market. So, when we say stock diversification, we’re talking about U.S. and non-U.S.

We would suggest up to 40% non-U.S. holdings. And when Greg talked about markets being overvalued, he was talking really about U.S. markets. If you look at other developed markets, valuations are more reasonable, so you can help yourself out, that when one zigs, the other one zags. And with equity markets, they’ll tend to move in unison, but one might dampen the other one’s volatility.

Now bonds typically zig when equity zags. What you’re trying to do is with diversification, mute your volatility without giving up too much in return. You will give something up, but you’re looking to mute some of that volatility. Maximize your return for a given level of risk.

Rebecca Katz: That’s great. Great analogy. Very fitting for Vanguard. Well, so you mentioned bonds and that you use them as ballasts, but what is our outlook for the bond market in 2018, Greg?

Greg Davis: So, when you think about the bond market, again, the best place to start is looking at starting yields in the broader bond market. And so, based upon where we are in the yield environment in the U.S. market globally, we’re expecting 10-year average annual returns to be somewhere between 2 to 3%. Again, lower than historical norms, but we’re starting at a lower level of yield and a bond is nothing more than a series of coupon payments and that maturity of that principal payment. And in this type of environment, we’re expecting, again, more muted level returns in that market.

But to Tim’s earlier point, it’s a key provider of that ballast in a portfolio. So, when you do have that pullback in the equity markets, you will have an opportunity to have an asset class that’s going to provide some diversification that will give you some power to rebalance into the equity markets which could be lower at some point in time.

Rebecca Katz: Well, if we’re expecting lower returns in the bond markets, we had a question come in through Facebook again asking, “If rates are going to rise, are there certain types of bonds you should look at?” Again, I think we have this issue of when interest rates rise, bond prices fall, so what types of bonds should you be looking towards?

Greg Davis: So, again, I would start with when you’re thinking about the diversification aspect of bonds, the first thing I’d say you want high-quality bonds first, so Investment-grade whether or not they’re corporate bonds, government bonds, things of that nature but very high quality because when you start venturing into high-yield, it has more equity-like characteristics, and they’re not going to provide that same level of ballast. So, when we think about a rising rate environment, it really depends on an investor’s time horizon. So, if you’re a long-term investor, if you own a short-dated bond fund or an intermediate-term bond fund, rising rates are actually a really good thing for you because that long-term time horizon, you have the benefit of those bonds, as they mature and coupons get paid, they’re being reinvested at a higher yield. So that’s ultimately going to return a higher total return for an investor in a rising rate environment than it would in a stable environment, again, for long-term investors.

Rebecca Katz: Yes. If you have a short-term, then you probably should align with more of a short-term bond.

Greg Davis: Exactly.

Rebecca Katz: Okay, great. Well, we’ve covered interest rates and stock valuations I think. Let’s see. We have a lot of questions. We get thousands of questions when people register online so it’s very hard to pick the favorite ones. But let’s stick with the fixed income space. And Doug in Manheim, Pennsylvania, said, “What’s our view on the yield curve in 2018?” And, again, just because I didn’t know what a yield curve was when I first started at Vanguard, if you can explain that and then explain your view.

Greg Davis: Sure. So, when you think about the yield curve, the yield curve is basically just plotting the various maturity points when it comes to the Treasury market. So, you can start off at the very short end with 3-month Treasury bills, 6-month bills, 2-year bonds, 5-year, 10-year, and 30-year bonds. And all those plots, if you connect it with a line, that’s going to give you a yield curve.

Rebecca Katz: So, it’s just their yields, their interest rates on those bonds.

Greg Davis: That’s exactly it. That’s exactly it. And you plot the line between those points that’s going to give you a curve to some degree. Normally that curve is upward sloping because most investors, if they’re going to lend money, they expect to get paid more if they’re going to lend money for a longer period relative to a shorter period.

Now what we’ve been seeing recently is because the Federal Reserve has been quite active in terms of raising rates—they raised rates in December of ’15, December of ’16, and then three times in ’17—we’ve seen the short end of the yield curve 2-year rates, 3-month bills, and all that rise. And, basically, over the last year or so, the 10-year Treasury has basically stayed the same. So we’ve seen what we call a flattening of the yield curve because the front end went up and the middle part of the curve basically stayed anchored.

Going forward, it’s really going to be dependent upon how aggressive the Federal Reserve acts and, also, a function of, well, what’s happening in the economy and inflation? To the extent that inflation starts to pick up, that’s where the longer end of the yield curve, 10 years and beyond, will be at somewhat of a risk to rising rates.

Rebecca Katz: Okay, so the longer bonds are much more sensitive to inflation.

Greg Davis: To inflation.

Rebecca Katz: Let’s talk about inflation, Tim. Allan in Ohio said he’s heard a lot of different answers to the following question, “What are our thoughts about inflation and when do we think it will start rearing its ugly head?” And he says, “There are signs of wage pressure and cost of goods going up.” I mean, certainly, unemployment’s pretty low. You would expect, wouldn’t you, that that would push wages up?

Tim Buckley: Traditionally you would. We’ve done this for years, in this webcast for years, and we had questions, “With extreme monetary policy would we get inflation? As the unemployment rate came down, would we get inflation?” This might be the year where we finally see a slight uptick in inflation. And let me explain why we haven’t seen it and why we might see a little bit of it this year. Not extreme inflation, but a little bit more than we’ve seen in the past.

You know, one thing we’ve had a lot of slack in the economy from a labor standpoint, and so that’s why historically there’s been a lot of excess. But those, as we know, unemployment’s come down.

One thing that’s helped keep inflation in check is technology. Now technology when you think about it, technology’s the one thing that each year for every dollar you spend you actually get more out of it. Other things just the price tends to just go up and I’m getting the same thing back, but I’m getting more out of technology each year. And if you look over the past ten years, technology as a component of cost of goods sold is really double, more than doubled. And you think about like your fridge is linked to the internet or you think about your car, all the technology in your car. And you used to be able to work on your car; good luck now. So, technology is a huge part of everything that we buy.

Well, that technology though gives you more for every dollar spent each year so that helps undermine inflation. It has a deflationary effect. So, Greg’s team estimate about 50 basis points a year, so without the effect of technology, inflation would be about 50 basis points higher each and every year.

So now you have to look at the other component that would drive inflation up, which is back to labor. Now labor, if we’re likely to see unemployment below 4%, you’ll see companies compete more and more for great talent. And as they compete for that talent, wages will be pushed up. And when wages get pushed up, that usually leads to a little bit more inflation.

There’s one other thing that can happen though. Rather than compete for talent, they may make another choice, companies. They may say, “You know what, instead of competing for that talent, I will substitute technology for that talent.” And there you could see an increase in business investment and technology investment.

2018 is going to be a telling year. In that year you’ll see whether or not wage inflation really starts to materialize and pushes up inflation, or you should see a big step up in business investment, if you will, and we’ll be watching both. But we’re also confident that inflation getting out of control, that the Fed would be all over that. They watch it. They watch it like the hawk.

Rebecca Katz: Okay, great. We always tend to tread gently on legislative issues since we represent 20 million investors and they all have very different points of view, but we do have a question about the potential economic or market impact of the tax cut stimulus that was just passed. So, what is our point of view on that from an economic perspective?

Greg Davis: We think that ultimately, in terms of lowering the corporate tax rate, that has some beneficial impact to the corporate market, you know, equity valuations and things of that nature. Now the question becomes, and we have to wait and see how this plays out, does that mean that these companies are reinvesting in technology, reinvesting in hiring more people? We’re not sure how that’s going to play out yet. Or are they doing financial engineering in terms of buying back stock or paying down debt or things of that nature?

So, if they’re doing more of the former, investing in plant and equipment, starting new businesses, hiring people, that’s going to be very helpful in terms of economic growth. If it’s more on the financial engineering side, I would say that would be less impactful from a longer-term basis other than rising stock prices and that boost to wealth effect which could have some—

Tim Buckley: That’s a bit of a sugar high though if you’re just buying back your own stock and stretching P/E multiples further just for them to plummet back down later on.

Greg Davis: Exactly.

Tim Buckley: We do worry about that one. If the money just comes back to buy back stock at high multiples, it’s not necessarily a good strategy.

Greg Davis: Agreed.

Rebecca Katz: Okay, so we’ll have to wait and see.

Why don’t we pivot to a few Vanguard-specific questions? We did have a question from Tom in Seattle, Washington, who said, “Why have we added actively managed factor-based funds and ETFs to the Vanguard lineup?” So, again, for those who may not follow us that closely, you might want to explain what a factor fund is and then why the new products?

Tim Buckley: Well, first, factor funds are simply substitutes for traditional active. Some people confuse it with indexing, but they’re substitutes for traditional active. And if you bear with me, I’ll explain what factor funds are. Factor funds usually provide you with exposure to certain risks that you should get rewarded for or behavioral bias. And what would those be? I’ll use a couple of examples: value.

Value stocks, why do people think they outperform?

Rebecca Katz: Right now.

Tim Buckley: If you look beyond the ten-year period that we just went through, typically value has outperformed over the long run. Why? Because these companies are usually downtrodden. They have low P/Es, lowest price, but they’re downtrodden for a reason. They tend to be riskier and you should be rewarded for holding them. Same with small companies. Small companies tend to outperform over the long run. Why? Because they’re more exposed to the economy, kind of the cycles of the economy and so there’s more risk there.

There are other things that are behavioral that should go away but they don’t. Things like momentum, when there is news on a security, news on a company that investors don’t put that all into the price of the stock right away that it can leak in over a little period of time creating momentum. Or low volatility has outperformed over the longer run. Why? Behavioral bias. Maybe it’s the professional investors saying, “Look, I need high volatility because most professional investors have high expenses they have to overcome, or they’re measured over the short run and they want higher returns.” So, you have all these biases and these risks that academics have gone through and said, “Hey, these seem to persist through time.” Factors give you exposure to those.

Now let me back up and say, “Well, why is it a substitute for active?” A traditional active manager, their return comes from three components. One is the market just being invested in equities. And call that 90% of the return, 90%, 92%. The other is that they’re exposed to some of those factors. Maybe they’re exposed to value stocks or maybe they’re exposed to momentum, and that’s 5% to 7% of the return. Believe it or not, their individual security selection might explain like 3% of that return. That’s the manager risk, and it can mean a lot over the long run if they get it wrong or if they get it right.

Some people say, “Look, I want to invest in a factor because what a factor will give me is it’ll give me that market exposure and that factor exposure, and I don’t have to take the manager risk.”

How would funds like these be used? Let’s say you wanted to tilt your portfolio toward value because you believe in value, maybe you do that. Maybe you have a portfolio that doesn’t have enough momentum in it relative to kind of equal weighting of factors; you might add momentum. Maybe Greg says, “Hey, look, I want to be exposed to all the factors and I’m going to have a diversified factor exposure.” He buys all of them. So, these are the different ways factor portfolios can be used. Usually we expect them to be used more by advisors, by professional investors completing portfolios kind of tilting portfolios one way or the other rather than being a mainstream product like indexing.

Greg Davis: And the key thing, just to add on Tim’s point, the key thing there is that you have the ability to get this exposure, again, in a very low-cost way relative to what you’re paying for when an active manager is giving you that exposure to whether or not it’s value or momentum or liquidity.

Tim Buckley: Great point.

Rebecca Katz: Okay. Well, let’s talk about index and active for a second and low cost because we had a follow-up question from Dan, thank you, who says, “Why do or don’t index funds outperform actively managed mutual funds?” So, we just talked about a flavor of active management, factors, and traditional active management. Don’t index funds always outperform?

Tim Buckley: Sorry, the question was why don’t they, index funds?

Rebecca Katz: No, the question is why do they?

Tim Buckley: Why do they always outperform? I hate to say it, it comes down to greed at the end of the day. And, really, index funds give you the market return. All active managers together give you the market return. And if you think of the active assets, back a few years, if you went back 20–30 years ago, actively managed portfolios included professional managers and amateurs. Actually, say in 1980, 60% of the market was really amateurs. 

Rebecca Katz: Really!

Tim Buckley: Yes, it was doctors and lawyers trading on their accounts at the end of the day, and 40% of it was professional managers, portfolio managers. And it was much easier for those portfolio managers to capture return in a zero-sum game, capture return from the amateurs. Over time, the amateurs got smart and they said, “We’re sick of getting preyed on,” and they employed professional managers, so the point where the market now is 80% to 90% professionally managed. So now it’s professional against professional.

So, in a zero-sum game, where expected excess returns were out here, they’ve been reduced by two-thirds. So, some people are going to outperform the market, but not by much, and some people will underperform the market. What’s happened here is expenses haven’t come down. And so, if you outperform the market, guess what, you’re taking it all in high fees so your clients don’t get it. And if you underperform the market, you’re adding insult to injury because not only did you underperform, now you’re taking a lot in high fees too.

So, what we think needs to happen in the active world for active managers to do better is bring their fees down. If you have excess returns, share it with your clients.

Rebecca Katz: So, it is possible for them to outperform; it’s just the fees erode.

Tim Buckley: Hey, we do it. We do. You look at our active managers, they outperform on, whether you’re looking at one-, five-, ten-year basis, you can asset weight it and you’ll see active outperformance of 80 basis points, 90 basis points a year. But if you put industry average expenses on Vanguard, that would disappear that outperformance. So, you can outperform, you just can’t outperform and be greedy.

Rebecca Katz: Shall not be greedy. Let’s talk a little bit about indexing. I’m going to stay with you for a second, Tim, but, Greg, feel free to add in. Obviously, we’ve talked about the benefits of low costs, but are we concerned at all about any potential negative impacts caused by the growth of index fund investing? I mean we’ve seen tremendous cash flow into index funds and ETFs, which are mostly indexed. So Avi in Potomac, Maryland, is asking this question. Any problems with that?

Tim Buckley: Well, if Avi were here, I’d say, I am more concerned with the people who are trying to undermine indexing. More people should be benefiting from indexing. Instead what you’re reading in the press, you’re hearing a lot of articles about indexing is destroying capitalism or the functioning of the capital markets. And a lot of this research, a lot of these papers, a lot of these claims are coming from those people who are losing out on active management fees, losing out on trading revenues. So, you just have to look at the source and go, “Oh, that’s interesting that you would complain about this.” Maybe you should just lower your fees as we talked about earlier and you’d do better against indexing.

If you look at what they are trying to say, they’re saying, “Hey, indexing is disrupting the capital markets.” Well, indexing is 35% of mutual fund assets. And if you look in the equity markets, it’s only about 5% of equity trading. Some people complain that index funds interfere with capital allocation and price discovery. 95% of the trading in the markets is all active.

Rebecca Katz: Is still active.

Tim Buckley: There’s plenty of price discovery. We have a long way to go before we start disturbing price discovery. So, I’d love to see the research that these people are basing their facts on when they say it’s next to Marxism in destroying capitalism. We see it as a great way for people to invest, and we hope more people do it.

Rebecca Katz: And globally, too. It’s a newer thing globally.

Tim Buckley: Globally for sure.

Rebecca Katz: Let’s switch to the global markets for a second, Greg. We have a question on the outlook for the international markets. I feel like I’m making you read a crystal ball tonight. Sorry about that.

Tim Buckley: Thank you for asking Greg.

Rebecca Katz: We should just put one in front of you and let you do some magic. But international markets, we’ve talked a little bit about emerging markets, but also, what is the outlook for Europe?

Greg Davis: So, I mean, when you think about Europe, I mean Europe is starting to benefit from the fact that the global markets and the global economy is rebounding; and so, we’re expecting economic growth in Europe to be about 2% in 2018. There’s also been a decline in terms of political uncertainty in Europe, which has been a big factor that’s also been holding Europe back.

Rebecca Katz: Brexit.

Greg Davis: We’re actually quite positive on Europe for the most part in 2018. And, again, as Tim mentioned earlier, when you look at some of the valuations in the international markets, they’re actually a bit more compelling than they are in the U.S. market, so, you know, better economic growth, less political uncertainty, better valuations. You know, the value of international diversification is actually really, really high at this point in time.

Rebecca Katz: Just to clarify, there’s not necessarily a 1:1 correlation between a country’s economic outlook and its financial market outlook, right? So, we might think the economies are strong there, but it doesn’t necessarily mean the markets would go up.

Greg Davis: That’s correct, it’s based upon what the market is already pricing in and expecting. So, if the market is pricing in 5% economic growth and the market only generates 3%, that’s going to be a disappointment to the market, right, because you’re not getting the type of earnings growth that you would expect. So, it’s really about what the market’s expecting and are there any positive or negative surprises that come in that is going to cause the markets to potentially reprice.

Rebecca Katz: So, let’s talk a little bit about emerging markets and China because that was one of the surprises in years past where they didn’t grow as much as was expected. What is our outlook for emerging markets?

Greg Davis: Yes, so when we think about China specifically, we’re expecting growth in the range of 6% to 6.5%. You know, there’s been a lot of uncertainty in China as they’ve been trying to mitigate some of the risk and some of the state-owned enterprises, trying to get out of some of the industries which have, you know, again been heavily influenced by government.

One of the things that we’ve been looking at is what’s happening in terms of regulatory reform in China? What’s happening in terms of the financial market reforms that have taken place there? You know, as long as the global economy continues to do well, we expect China to do relatively well. The big risk factor there is as they’re trying to move from an economy that’s been capital investment driven, trying to build plant and equipment. That’s really been the focus and a driver of economic growth in China. Now they’re trying to transfer from more of a capital-intensive society into more of a consumer-based society. And consumer-based societies, ones that are driven by consumption, they tend to grow slower than societies and economies that are driven more from an investment standpoint. So, over time, that 6% to 6.5% that we’re expecting in the near term, will likely decline more over time.

Rebecca Katz: It’s just a maturation process, right.

Greg Davis: That’s exactly it.

Rebecca Katz: We actually did have a follow-up question from Robert in Wisconsin who said, “What is an emerging markets nation?” You know, quite frankly, some of the ones that are defined as emerging markets don’t seem so emerging any more. How do we define that?

Greg Davis: Yes, the definition of emerging markets, I think, was created like in 1981 by some economists working for the International Finance Corporation in terms of like they were in the process of starting a mutual fund, so they tried to define what an emerging market really is.

And I guess the best way to think about it is that when you look at GDP growth, when you look at the level of education, when you look at some of the normal property rights and intellectual property rights that we have in the U.S., some of the emerging markets don’t have that as well. And so, there’s greater uncertainty in those types of markets, so they tend to be viewed as developing economies. So that’s a quick way to try to define that.

Rebecca Katz: Okay. Well speaking of lack of regulations, bitcoin was the number one question we received when people registered. Everyone wants to know about bitcoin. So, Tim, what are your thoughts on bitcoin?

Tim Buckley: I’d love to know more about bitcoin. I don’t know if I’m qualified to talk about the future of bitcoin, but I’m not sure who is. It’s interesting to watch. What I can tell you is we will not be offering any fund that centers on cryptocurrency. As a rule, we’ll offer funds with assets that generate economic value—it’s kind of one of the rules we have. Greg keeps talking about, “Hey, where’s this stream of income coming from, where are their earnings coming from?” Something like bitcoin doesn’t have an earnings stream.

It’s like gold. Gold, for thousands of years, has been this store of value; and it goes up and down. Gold would have the demand for things like jewelry and all, but it really goes up and down with fear. Do you worry about geopolitical events? Do you worry about inflation? If you’re worried about that, gold goes up. If you’re not, it comes back down.

Bitcoin looks like it’s going to have the same ride, just a little bit more volatile. So there’ll be a nice battle between bitcoin and gold. The old world, the new world rule went out. I’ll be a spectator, we’ll be spectators to that one. Don’t expect us to have a cryptocurrency fund. We find it speculative, and we don’t like having returns based simply off of speculation without kind of underlying return value.

Rebecca Katz: Right.

Greg Davis: Having been in this business for about 20 years or so, it’s eerily similar to the dot-com era back in the late 1990s when everybody you spoke to was talking about the newest and greatest dot-com. And so, between—

Tim Buckley: I hope your mom hasn’t been asking.

Greg Davis: She has not. She has not. But that day would probably be the top in the bitcoin market when she does. But what I would say, it reminds me very much of that, when anything with a dot-com behind it skyrocketed in valuations. We’ve seen some of that behavior. It doesn’t matter whether or not it’s bitcoin or some of the other cryptocurrencies or even companies that all of a sudden—

Tim Buckley: Or even say blockchain.

Greg Davis: Yes.

Tim Buckley: So blockchain, I should mention, Greg. Blockchain is something we are excited about.

Rebecca Katz: So blockchain is the underlying technology.

Tim Buckley: The technology behind bitcoin. This whole digital distributive ledger. We actually think in our industry, it will change it dramatically over the next decade. You know, how we settle trades, custody, assets—all those things, it might change when you transact, when you buy a house. It may affect how that transaction goes. It could simplify and take a lot of costs out of the system.

So blockchain, the underlying technology of bitcoin, that’s really attractive.

Greg Davis: Exactly.

Tim Buckley: We’re looking at that as attractive, and companies who have any blockchain in their name or any blockchain business, those stocks go soaring too. So it does have that dot-com element.

That’s a good catch. We are excited about the underlying technology. Bitcoin by itself—

Greg Davis: Not so much.

Rebecca Katz: Okay, you heard it here first. At least gold you can wear. I mean, my goodness.

All right, so we have a couple questions that have come in on our social media feeds. We had another tax question around the deficit. We didn’t really talk about impact to the deficit when we answered the question on tax legislation, so I don’t know if you’d like to try tackling that as well, but do we have concerns about the growing deficit in the U.S.?

Tim Buckley: Well you go first.

Greg Davis: Sure. So, I mean, if you just take a look at, before you even get to tax reform, I mean you already have some demographic issues that are going to increase the deficits in general. So, between Social Security and aging population, Social Security, Medicare, Medicaid, it’s already expected that the budget deficit in the U.S. over the next 10 years or so is probably going to rise to north of 5%. And over the next 20 years, probably north of 7%. That’s before you even factor in the fact that this tax reform policy is likely to add another trillion to a trillion and a half to the deficit.

And so, the reason that’s challenging is because the U.S. government is going to have to go out and borrow that money, and over time, as your debt to GDP starts to rise, investors will start to look at you and say, “Your country is a bit more risky than it was before.” So, if I’m going to invest in a country that has more risk, I am going to expect to get paid a higher level of interest on that debt. And so that starts to become somewhat of a challenge for the economy because that’s going to consume more of the resources of the government over time.

Rebecca Katz: I see. So it’s a lot like personal finance. They look at you and your credit rating.

Greg Davis: That’s exactly it.

Tim Buckley: Well, it can be really bad. Like we’re a ways from that, but no one knows where that point is, the point that Greg talks about. When you’ve borrowed so much that no one really thinks you’re the same credit that you used to be, they demand a higher rate, which means that you have to borrow more to pay, and so you get in this vicious cycle, and it’s tough to get out of. We see economies around the world fall into it. We shouldn’t think just because we’re the U.S. that we’re going to be immune to it no matter what, and that’s the attention that’s paid to it.

Rebecca Katz: I see, okay, great. Wow, we have a lot of great questions. Hey, Tim, this one is for you from Sarah. Sarah asked for Mr. Buckley, “How are things going as CEO?” You’ve now been in your role a whopping four days?

Tim Buckley: Yes, if you count the first. Look, it’s fabulous. I get a chance to lead a company where I’m passionate about the purpose of Vanguard, where each day we come in every day to help investors achieve kind of that investment success. And for them it may be putting their kids through college or peace of mind around retirement; that’s a great thing. And to work with crew that you truly care about, you couldn’t ask for more, and to have a team that’s top notch. I’m lucky, I’m very lucky. I’ve had great mentors. So, the first four days, they’ve been great; and, well, hopefully looking for many, many more into the future.

Rebecca Katz: Right. I should ask the same of you, Greg, but you have been a Vanguard CIO before. It was just in our Asia Pacific region.

Tim Buckley: And he’s been CIO for about six months now. I had the long transition period where he moved into the CIO role, and Bill was great with me. He allowed me time before becoming CEO to really spend time with crew, with clients, to get to know businesses that I might not have spent as much time with. Greg didn’t have that luxury. He got to step right into the CIO role on July 14.

Rebecca Katz: Good markets for you though.

Greg Davis: It’s been a really good market, but also having Tim nearby in terms of asking questions and getting guidance along the way has been really helpful. But, you know, I’d echo a lot of the same points that Tim was making. We have a very talented team that we’re very privileged to work with on a day-to-day basis; and, again, having such a strong mission about what we do day to day, charges the team up to come in and do the very best for our clients, to get the absolute best investment returns that we can for them.

Rebecca Katz: That’s true. That’s why we all braved the ice and snow this morning. It was really awful here getting in, but we all did it because it was for our clients.

All right, speaking of clients, we have a great question from Ryan who’s in Provo, Utah. Ryan, thank you for this question. He says, “I’m just someone starting my investing journey. I have a small paycheck. What tips do you have for me? And I’m trying to save about 20% of my salary.” I was nothing like Ryan when I first started out, so what tips do we have for him? Sounds like he’s doing a great job.

Tim Buckley: Yes, first congratulations to Ryan for the 20%. That’s a great number to start with. I’d say, Ryan, first take advantage of anything the government gives you. They give you tax-deferred vehicles; max them out. IRAs, 401(k)s, max out those tax-deferred vehicles. You don’t always often get a break from the government, so take advantage of it.

The second thing, I think Greg, you’d agree with, is keep it simple. If you’re starting out investing, there are turnkey portfolios, balance funds. You could start looking at target retirement funds, and they tend to be more aggressive when you’re younger; and they get more conservative when you’re older. It’s kind of a one stop, put the money in, it’s diversified—diversified globally, diversified from bond stocks, everything we talked about.

Then let me give you a third piece that you may not expect, and it’s advice that was given to me by our former Chairman and CEO, Jack Brennan. And he told me when I was younger “to pay myself first.” And what he meant by that was anytime that I received a raise, rather than go out and spend it and have it end up in some retailer’s account, put it in my account first.

Rebecca Katz: Right.

Tim Buckley: And put it away first. If you’re happy with where your life already was, then put it away. You know, if you didn’t get into debt, you can put it away; and you will never regret that. So that’s the third piece of advice I’d give.

Rebecca Katz: Okay, great. Well, congratulations again. That’s really, 20% is wonderful. You’ll be well on your way.

Let’s shift to the other spectrum. So for you, Greg, Chris in Hartland, Wisconsin, says, “Are there specific risks for a new retiree in 2018?” I mean that must be hard, thinking “Will the market decline? I just went into retirement.” What should Chris think about?

Greg Davis: Yes, for Chris I would say, again, focus on the balance and diversification. And given this environment that we’ve been in, with such a low yield for such a long period of time, a lot of investors have moved from short-dated bond funds, more high-quality bond funds into high-yield or high dividend-paying stocks, REITs, as another example to try to stretch for additional yield.

I would just be very cautious to make sure that Chris is taking a real hard look at his asset allocation and that he hasn’t moved too much over to investments that are trying to produce a higher yield because that could basically cause your portfolio to be off balance and not give you the type of diversification that you would normally have with a good stock and equity mix.

But, again, you know, in this type of environment where we’re expecting, again, global equities, U.S. equities, and even bonds to have lower returns than they have historically, you know, it’s going to be somewhat of a challenging environment.

Rebecca Katz: And I guess with someone newer, they can save more. With a retiree. They just have to look at spending as well and maybe spend less.

Greg Davis: Yes, that’s exactly it.

Rebecca Katz: Okay. We’re, unfortunately, growing low on time, so let me ask a couple of quick—

Tim Buckley: We’ll have a speed round.

Rebecca Katz: A lightning round. I like the lightning rounds. A couple Vanguard questions. So, Richard, a local here in Havertown, Pennsylvania, says, “Given the negative growth of Vanguard, how will we keep our focus on the clients?” See, we all talked about how jazzed up we are to come in every day and serve clients. But it’s a lot different than when you and I started here all those years ago—a lot bigger and a lot more, not that many more crew, but more crew.

Tim Buckley: Yes, but it isn’t that different at the end of the day, at the core. Right, our structure and our purpose are the same. Our structure is that we’re owned by our clients. So, if we’re owned by our clients, then they’re the people we serve. And our clients, with everyone watching, you’re our bosses. Right, so if we’re not serving you, I’m not sure who we’re serving. It would be misguided not to serve them.

And then our purpose, I talked about it. We come into work each and every day to make sure that we take a stand for our investors and give them the best chance of investment success. So that’s our focus. That’s why we get out of bed. We don’t ask people to come in, people don’t come here because, well, they like making the capital markets more efficient or simply like, “You may love investing, but you better love investing for our clients, because if you don’t, this probably isn’t the place for you.”

So, I would say it’s the same place I joined in 1991 and the same place that the two of you joined. That part hasn’t changed.

Rebecca Katz: Great, well, I guess I know the answer to this question. But Paul in Elgin, Illinois, says, “Will we continue as the low-cost choice for investors?”

Tim Buckley: What do you think? Of course, right? We will never lose that. We believe in keeping costs low. But it’s more than that. You know, our structure and our design is to keep driving costs lower, but we’re proud of, you know, I love to explain to people. We’ll give you the lowest cost but also the top performing in Greg’s team or outside managers, the top performing funds in the business, outperforming 95%* of their competition over the long run. Can you think of many companies that actually give you the highest-quality product, top performing product, at the lowest price in the industry? I’d love if many more companies would actually do that. That would make our choices a lot easier. That’s what we essentially do, the value we drive for.

*Source: For the 10-year period ended September 30, 2017, 9 of 9 Vanguard money market funds, 51 of 54 Vanguard bond funds, 22 of 22 Vanguard balanced funds, and 102 of 108 Vanguard stock funds—for a total of 184 of 193 Vanguard funds—outperformed their Lipper peer-group average. Results will vary for other time periods. Only mutual funds with a minimum 10-year history were included in the comparison. Source: Lipper, a Thomson Reuters Company. The competitive performance data shown represent past performance, which is not a guarantee of future results.

And we don’t ask you to give anything up. If you look at service, our service is rated higher than, basically, across every industry. We got some of the top ratings in client service, and we keep investing in it. We’ll keep investing in the digital side of the service, keep investing in advice, and make sure we’re always attracting the top talent here. So, this is a place where we believe you can have your cake and eat it too.

Rebecca Katz: You know, Greg, I actually want to give you a moment to talk a little bit about the investment teams because we often think that we have this low-cost advantage that helps with fund performance. But, obviously, the investment management teams and our technology have a lot to do with that too. So maybe you can talk a little bit about how you think about your team.

Greg Davis: Yes, when we think about our team, I mean people are the core element of it, right. Again, when you think about how we manage our investment process, whether or not it’s the tight tracking in our bond index funds, equity index funds, or whether or not it’s the value we’re trying to add in the quantitative equity space or the active fixed income portfolios, it’s really driven by the team—the folks that we’ve been able to assemble, either from growing them internally or bringing in talent from the outside.

But what allows them to do it really well is leveraging technology to its fullest. Having state-of-the-art systems that allow us to communicate around the globe and function as one team. So, it’s a leveraging of the talent and the technology and people who have a tremendous amount of experience in the various sectors of the market in which we invest. That would be the key things that drive us in terms of allowing us to be successful.

Rebecca Katz: Great. Well let’s spend a moment on technology. We’ve actually just gotten quite a few questions in on cyber security, so it’s a totally different approach to technology; but, obviously, one of the concerns our investors have is, is their money safe and do we have to worry about hacking and things like that?

So, Tim, maybe you could touch on a little bit about cyber security and some of the things Vanguard does to protect against that.

Tim Buckley: I think it’s the right to ask. It’s our number one priority. If you invest with us, we have to keep your assets safe. That’s the trust you put in us, and we can never take that lightly, so it’s our biggest investment every year is fighting against cyber threats. So cyber security is our number one investment, and we don’t think of it as just one piece. If you think about when it’s done well—“defense in-depth” is the industry term—we’re looking to make sure that, yes, it’s very tough to penetrate into Vanguard. That when patches need to be made, they’re made immediately. We assume that someone, they get through; and if they get through, do we limit their ability to move around within Vanguard? Within our network? And if they get to something, is it encrypted? Can we watch what they do? Can we repair what they do? All of these questions have to be asked.

And we won’t go into the details of how we do what we do, but we see it as our number one priority. Greg may not like to hear that, and his number one is actually to actually earn the return. First thing we’d say, number one, is make sure you don’t lose their money; and you don’t jeopardize their data. Second is to make sure we give them the proper return on it, so it will always be a high priority for us.

I wish it weren’t the case. I mean I got to see this mature. I was the Chief Information Officer back in 2001 when this started to really take off. It’s amazing to see how advanced it is now, but I also know that we’ll never be able to rest because as soon as you think you’re good, that’s when you’re vulnerable.

Rebecca Katz: Well, good. That is one risk we’ll keep our eye on.

You know, unfortunately, we only have a couple minutes left. With the changeover in leadership, obviously, we’ve got a few questions about what might change here at Vanguard, so I would say two questions that are very similar, Harland in Santa Rosa, California, said, “Does new senior leadership mean we should expect significant changes at this long-trusted institution?” And then Isaac says, “What are Vanguard’s guiding principles?” which I would assume are not changing, based on what you said. Would you like to talk about those?

Tim Buckley: Yes, let me hit the change one first. Our clients should expect change. They should expect significant change over the long run because it’s in the DNA of Vanguard that we abhor complacency, and we like to embrace change, embrace disruption for the benefit of our clients.

This is a very different company than the one you joined, Rebecca, in the late ‘90s; and it’s very different from the one I joined in the early ‘90s. I think about, well, would you want the expense ratios you had then, the limited choice, no web, no ETFs? I mean, if you look at what we’ve embraced, we’ve been a pioneer for change. Index funds, really the first to push index funds. Going no-load, embracing the web, being a leader in ETFs, being a leader in target date funds. All these things have helped grow Vanguard and helped serve our clients better. They have been critical to Vanguard, so expect us to continue down that path.

The one you see taking off now is around advice. We have lowered the cost and complexity of investing significantly with funds. Expect us to do the same with advice.

And now, Greg, I don’t know if you want to comment on kind of the guiding principles of Vanguard; and I’d welcome the two of you to jump in here. But I always look at it as the guiding principle of Vanguard from a crew member’s perspective. When you come in every day, what do you do? Put the client first in everything you do.

Rebecca Katz: Right.

Tim Buckley: Right? Put the client first. Integrity in everything you do because we have one asset—it’s the client’s trust. And if we breach that trust, Vanguard’s done. I think we all believe that you take care of the crew because the crew takes care of the clients. And you have to have passion for how we invest. Passion for how we invest—it’s different, and we believe in it. You get those things right you’ll be differentiated over the long run, but they are our guiding principles.

Rebecca Katz: That’s great.

Greg Davis: Well said.

Rebecca Katz: I don’t think we could top that. We have maybe time for two more questions. One thing that has changed a lot, you touched on it a little bit, is the growth of ETFs. And we have a question in about whether or not ETFs would surpass index funds. So, Greg, what are your thoughts in the ETF marketplace? Maybe why have we seen this meteoric rise in ETFs?

Greg Davis: I think for ETFs, in general, we look at them, we’re agnostic between ETF and a mutual fund. Many of our ETFs are actually just a share class of our existing funds, so we look at it, and they’re managed as one single portfolio in the bond market, in the equity markets for the most part. And so, the reason for the rise is that it’s been a low-cost way for investors to get access to highly diversified asset classes in the fixed income space and the equity space. And so, investors have continued to gravitate towards lower-cost investing because they realize that, to Tim’s earlier point, that’s the one thing that you can control and that’s cost. But there’s also been many advisors who they, for some reasons they weren’t able to buy the fund, but the ETF share class was a way for them to get access to Vanguard and other distributors of investment products.

Tim Buckley: And I think for that last reason, ETFs work better for advisors. That’s why ETFs will exceed traditional mutual funds and assets. Because most people in the market don’t invest directly, they invest with an advisor and ETFs happen to be the vehicle of choice for advisors around indexing, so you can expect that. But as Greg said, look, if you’re investing directly with Vanguard, just as easy to buy an ETF as our traditional index funds.

Rebecca Katz: Right, and to Greg’s folks, it’s all the same pot of money.

Greg Davis: That’s exactly it.

Rebecca Katz: Okay, great. Unfortunately, we have a lot of great questions. We have more questions that have come in, but I don’t think we have time for them. And I did want to give you each a moment if you have some final thoughts for our shareholders especially for viewers, again, who might be feeling a little tentative about the market since they’ve done so well. So, if I can put you on the spot, Greg, maybe a little guidance or wisdom going into 2018 for our shareholders.

Greg Davis: Main focus would be, again, balance and diversification would be the key things, and don’t chase returns. Equity markets have been on a tremendous run. It’s important for investors to make sure they’re looking at the overall risk that they have in their portfolios. How does it align to their overall risk tolerance and their investment goals? And to the extent they haven’t rebalanced and their allocations might be out of whack, I would encourage them to go ahead and take the time to rebalance back to what their asset allocation goals are.

Rebecca Katz: Great, Tim?

Tim Buckley: Yes. I think that’s great wisdom. Prepare for volatility. We haven’t had it. Prepare for it. Keep your diversification. Get ready to rebalance. If we don’t get the volatility, well, that’s great. But if we do, be ready for it. And then a big thank you to our clients for entrusting us with their assets, something that the three of us will never take lightly and nor will the 17,000 other crew members at Vanguard. We’re pleased to serve our clients and we look to make sure they hit their long-term goals.

Rebecca Katz: That’s great. Well, thanks to both of you. I mean it’s always a fast hour with the two of you and so glad to have you on board for many, many more years of webcasts with you.

And to all of you at home, thanks so much for spending an hour with us. You will see on your screen a little red widget icon popup. That’s a survey. We’d really like to hear your feedback on tonight’s webcast and any ideas you have for future webcasts. We also will be sending out highlights of tonight’s webcast in an email to you with transcripts for your reading pleasure. And then, of course, we’ll have a new webcast in the near future.

I would also like to just add my thanks to you for being a part of our community of investors. We have these like-minded investors that really value long-term gains over short-term gains, and it makes us so happy to come in and serve you day in and day out. So, thanks for being a part of Vanguard, thanks for making our job so easy, and we hope to see you next time.

Rebecca Katz: Hi, I’m Rebecca Katz, and you’re watching a replay of a recent live webcast where our new leaders shed some light on 2018. We hope you enjoy it.

Important information

All investing is subject to risk, including possible loss of principal.

Diversification does not ensure a profit or protect against a loss.

Dollar-cost averaging does not guarantee that your investments will make a profit, nor does it protect you against losses when stock or bond prices are falling. You should consider whether you would be willing to continue investing during a long downturn in the market, because dollar-cost averaging involves making continuous investments regardless of fluctuating price levels.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.  High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.

Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

© 2018 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.