Vanguard's ETFs suffer tarnished reputation

Nov 13, 2006 @ 12:01 am

By David Hoffman

PHILADELPHIA - The Vanguard Group Inc. has an image problem when it comes to its exchange traded funds, according to some industry experts. The company is not viewed as terribly innovative or seriously committed to the ETF space, they said.

That perception was bolstered last month when Vanguard lost Noel Archard, a key player in the growth of its ETFs, to rival Barclays Global Investors of San Francisco. Mr. Archard, formerly a Vanguard principal in charge of institutional ETF sales management, now is head of product development for Barclays iShares ETF business in the United States.

Vanguard, however, is team oriented, and the departure of

one person won't hurt its ETF efforts, said John Demming, a spokesman for the Malvern, Pa.-based company.

Some Vanguard watchers said they aren't so sure.

Know when to fold

Mr. Archard may have figured out that his job was done at Vanguard, said Daniel Wiener, the Brooklyn, N.Y.-based editor of The Independent Adviser for Vanguard Investors, a monthly newsletter.

"Vanguard has a presence in the [ETF] marketplace, and they'll be adding a few new ETFs, but that's kind of boring," Mr. Wiener said. "[Mr. Archard is] smart enough to take it to the next level, and Vanguard doesn't want to go to the next level."

Some financial advisers agree.

"There's so much more interesting stuff happening elsewhere," said Thomas F. "Tif" Joyce, president of Joyce Financial Management in Sebastopol, Calif.

For example, ETF providers are dabbling in such practices as fundamental indexing - in which stocks are weighted on fundamental financial data rather than their relative size to the market - but Vanguard appears to be staunchly opposed to the idea, he said.

Barclays hasn't embraced the idea either, but with 119 ETFs in existence at the end of October, it appears much more willing to experiment than does Vanguard, which has just 26 ETFs.

Another problem for Vanguard: Its ETFs are perceived as secondary to its mutual funds, said Tom Mench, chairman and chief investment officer of Mench Financial Inc. of Cincinnati. "They have had to deal with the question mark of what status [its ETFs] hold relative to the total organization," he said.

That question mark has gotten only bigger in the wake of Mr. Archard's departure, Mr. Mench said. Mr. Archard was a leader in the effort to get advisers to use ETFs, and Vanguard hasn't said whether it intends to replace him, Mr. Mench said.

Mr. Demming wouldn't comment on a possible replacement but did say that Vanguard remains committed to the ETF space. Vanguard always has said that it would take a "measured" approach to ETF product development but also would seek to broaden its lineup, he said. For example, the company expects to roll out a high-dividend-yield offering sometime later this year, Mr. Demming said.

Several industry watchers added that Vanguard isn't the only firm to have suffered defections. Barclays has seen more people leave than any other firm involved in ETFs, but no one is questioning its commitment to the market, they said. Tony Rochte, national sales manager for iShares, left Barclays last month to head U.S. sales and intermediary client services at rival State Street Global Advisors of Boston.

Free-agent signings

WisdomTree Investments Inc. of New York has snagged a number of former Barclays people this year. Bruce Lavine, a key member of the iShares unit since its inception, now is president and chief operating officer of WisdomTree.

There has been a lot of executive turnover recently, Mr. Mench admitted. To a large extent, it has to do with the fact that the industry is maturing, and firms are having to compete for talent, he said.

One former ETF executive who hasn't yet been snatched up and who is a possible replacement for Mr. Archard is Gus Fleites, who until last month was the chief investment officer for ProFund Advisors LLC of Bethesda, Md.

The company wouldn't comment on why he left, but if Mr. Fleites were to join Vanguard, he would bring a distinguished ETF pedigree. Before joining ProFund Advisors in August 2005 and helping it to launch leveraged ETFs, he helped start SSgA's ETF business.

A move to Vanguard, however, seems unlikely, given his apparent emphasis on more-creative ETF structures, and the firm's apparent reluctance to dabble in such products, said Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I.


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