Three things that worry Vanguard's Jack Brennan

Vanguard's chairman emeritus especially concerned about growing ETF universe

By Jason Kephart

Feb 17, 2013 @ 12:01 am (Updated 10:38 am) EST

Jack Brennan
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

  @IN Wire

Apr 23 09:00PM
Behavioral Economics Blogs? http://t.co/9Dj2s0jqTo
Apr 23 06:54PM
Size of Fidelity & BlackRock foreign subsdiaries triggered systemic risk review http://t.co/0ZYakcfRNm

Career Center

Explore your opportunities and be informed for your next move.

Company Type
Firm Type
Clearing Firm
Presented by

Most Watched Video

7:12The 2 biggest factors driving growth in active ETFs

Ugo W. Egbunike Dir. Of Business Development, ETF.com Greg Crawford Deputy Editor, InvestmentNews

Video Spotlight
1:47People are Living Longer. Good News or Bad News?

Sponsored by Oppenheimer Funds Inc.