Our perspective on market volatility
Fran Kinniry, Vanguard's head of portfolio construction, discusses recent market volatility and what you should do in response.
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Liz Tammaro: So we received quite a few questions in advance when you all registered for this webcast. We're going to get started with our first question and, Jim, I'm going to give this one to you. So it makes a lot of sense before we get started, let's define what is an ETF.
Jim Rowley: Simply put, an ETF is an exchange-traded fund, right? It's a pooled investment vehicle that acquires or disposes of securities. Investors own a pro rata share of the assets in that fund. The fund issues new shares or redeems existing shares to meet investor demand.
Furthermore, and I should say providing some type of an investment exposure to those advisors, whether it's an index in particular or a market strategy. And when you think about even more so what makes them similar to mutual funds is that the majority of ETFs are organized and regulated as investment companies under the Investment Company Act of 1940. And that's the same regulatory regime under which mutual funds operate. So for all the discussions sometimes we hear about differences between mutual funds and ETFs, they're overwhelmingly similar actually.
Liz Tammaro: And even thinking about that, we can talk about maybe what are some of the benefits of the mutual fund versus an ETF or, sorry, even vice versa, ETF versus mutual fund. And even maybe what are some of the disadvantages.
Jim Rowley: I'll take that because I think I don't necessarily like the word disadvantage. I think differences is maybe the more appropriate term. And we just addressed some of the similarities between ETFs and mutual funds, so it's maybe more important to know what are the actual differences. And really the differences come down to two major items and they both relate to how investors transact in shares of those funds, right? We're talking about exchange-traded funds.
ETF investors they trade with each other on exchange in terms of buying or selling their securities, and the price that they get is a tradeable market price. Mutual fund investors, on the other hand, they are buying and selling their shares directly with the fund and they might do that through some type of intermediary but it's back and forth with the fund itself and they get an end-of-day NAV.
So we think about all the similarities and, again, sometimes there's a discussion about how different they are; but, really, the differences come down to those two items. It's trading on exchange versus direct with the fund and it's trading at a market price rather than getting the end-of-day NAV.
Jim Rowley: I think we actually have a great way to illustrate that. I think we have a chart that addresses that point that Doug was talking about that ETFs are overwhelming. They just happen to be index funds. And when the chart comes up, a simple way to illustrate this is we look at expense ratios. But instead of breaking them down by ETF versus mutual fund, we break them down by index fund versus nonindex fund separated into ETF and mutual fund. And when you see the expense ratios, you see that given an indexing strategy, whether it's a mutual fund or an ETF, the expense ratios tend to be lower than they are for the nonindex strategies, whether it's an ETF or a mutual fund.
So it has a lot more to do with whether or not it's an indexing strategy than whether or not it's an ETF or a mutual fund.
Liz Tammaro: And similar to that question, we have another one that's come in from Bruce asking about how easy is it to buy and/or sell an ETF versus a mutual fund?
Jim Rowley: A lot of moving parts in that question because I think the default has always been mutual funds because they've been around longer. So it becomes a lot of a comfort decision in many ways where purchasing a mutual fund is usually done in dollars. You put your orders in in dollar terms. You're happy to hit the enter button on your keyboard because you know at the end of the day your order is going to execute at the end of the day with a 4 PM NAV. You might be able to get fractional shares because your order gets rounded up into dollars and the mutual fund takes care of the automatic reinvestment for you.
With an ETF, investors need to be aware of transacting through their brokerage account. And now the dynamic might be a little bit different because you have to put your order in in shares, mutually speaking. There's no fractionals there. When you put your order in shares, you get a corresponding dollar amount rather than put the order in dollars and you get a corresponding share amount.
So, you know, the ease comes with a comfort level that a particular individual might choose or have a preference for doing.
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