Three things that worry Vanguard's Jack Brennan

Vanguard's chairman emeritus especially concerned about growing ETF universe

Feb 17, 2013 @ 12:01 am

By Jason Kephart

Jack Brennan
+ Zoom
Jack Brennan (Bloomberg)

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 IndexUniverse LLC's Inside ETFs conference last 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.

"AN OXYMORON'

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,” he said.

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

ETFs initially were identified as one of the culprits of the May 2010 so-called flash crash, even though later research found that they had 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.

jkephart@investmentnews.com Twitter: @jasonkephart

0
Comments

What do you think?

View comments

Recommended for you

Latest news & opinion

The appeal and pitfalls of holding unconventional assets in retirement accounts

While non-traditional asset classes held in individual retirement accounts may have return and portfolio diversification benefits, there are "unique complexities" that limit their value for most investors.

Wells Fargo's move to boost signing bonuses could give it a lift

Wirehouse is seen as trying to shore up adviser ranks that took a hit after banking scandal

New Jersey fines David Lerner Associates for nontraded REIT sales

Firm will pay $650,000 for suitability, compliance and books and records violations.

Report predicts $400 trillion retirement savings gap by 2050

Shortfall driven by longer life spans and disappointing investment returns.

Wells Fargo will ramp up spending to lure brokers

Wirehouse, after losing 400 brokers in first quarter, is bucking trend among rivals who have said they are going to cut back on spending big bucks recruiting veteran advisers

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print