Inside ETFs Live Three things that worry Vanguard's Jack Brennan

Growth of exchange-traded funds doesn't come without risk, he says

Feb 11, 2013 @ 4:05 pm

By Jason Kephart

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Exchange-traded funds have made financial advisers' jobs a lot easier, but the explosive growth of the products doesn't come without risk, according to Jack Brennan, The Vanguard Group Inc.'s chairman emeritus.

“ETFs are one of the few great and disruptive innovations in the retail marketplace,” he said during a keynote speech at the IndexUniverse LLC's Inside ETFs Conference on Monday. “The tools in an adviser's tool kit have never been better.”

That said, Mr. Brennan, who oversaw Vanguard's push into ETFs during his 12-year run as chief executive, noted that not everything in the ETF world is hunky-dory.

He is particularly worried about the growing universe of ETFs, which number over 1,000 today.

“Products keep coming out, and it's worrisome,” he said. “The big challenge for advisers is figuring out what's innovation and what's proliferation.”

The main cause for concern is new ETFs that are tracking back-tested indexes.

In fact, the majority of new ETFs that are launched track indexes that are less than six months old, Joel Dickson, senior investment strategist at Vanguard, said in an interview.

Mr. Brennan is also concerned about actively managed ETFs, which hold just 4% of all ETF assets.

“I just don't get it. The idea of an active ETF sounds like an oxymoron to me,” Mr. Brennan said.

“One of the reasons you index is to take manager risk out of the equation. They'll come though and they'll probably pick up market share,” Mr. Brennan said.

“I worry about what effect it will have on the credibility of the product,” he said.

The last thing that worries Mr. Brennan about the future of ETFs is regulation.

ETFs initially were pointed at as one of the culprits of the May 2010 so-called flash crash, even though later research found them to have nothing to do with it, he said.

“We don't need this product to be colored as more worrisome or complex than it really is,” Mr. Brennan said.

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