: ETF or Mutual Fund? The question is, does it matter to Vanguard? Hi there, Im Scott Burns, Director of ETF Research with Morningstar. Joining me right now is Rick Genoni, the head of Vanguards ETF business.

So, Rick, outside of your own personal disposition toward ETFs, I think a lot of viewers out there are confused or just wonder Does Vanguard care whether someone buys the mutual fund version of a fund or the ETF share version of the fund?

Rick Genoni: I think we certainly care, because theres a right product for each client, based on the strategy that theyre looking to implement in the marketplace. ETFs are not the right answer for every client. Mutual funds are not the right answer for every client.

It really differs, based on how much time theyre going to hold the product, how much money theyre putting into the marketplace, what strategy theyre using. Vanguard does care, but broadly we view ETFs as simply a way to package the great indexing prowess that we bring to the marketplace.

It allows us to tap into the adviser marketplace, and offer a great solution to the adviser marketplace.

Burns: Have you seen any cannibalization at all with the ETF product? Is there swapping or cannibalization?

Genoni: I think industry-wide, ETFs haven taken share from index mutual funds. We havent seen that with our own funds. Broadly, I think most of the cashflow going into ETFs is coming from actively managed funds and from single stocks.

Clients who are using single stocks, are looking for a little bit broader coverage of the market without that single stock risk. Certainly, active managers have had trouble in the past couple of years.

Indexing, overall, is gaining popularity with clients. But again, ETFs are just another way that we use to package our current indexed products and get them into the marketplace.

Burns: Are you starting to see adoption of your ETF products by institutional clients? I think more investing. I always like to describe ETFs as in the sixth inning as trading vehicles, but really in the first inning as investment vehicles. Included in that would be pension funds and endowments. Im sure there are other folks that invest across the Vanguard platform. Are you seeing any switching there, or adoption?

Genoni: Were certainly seeing use of our ETFs by both retail and what Ill call institutional clients, being the hedge funds and the asset managers. There are certainly some strategies that the institutional marketplace uses with ETFs like equitizing cash, taking small sector bets.

Theyre a great tool to jump in and out of the marketplace. ETF cashflow coming into a fund doesnt cause transaction costs on the fund overall, whereas cashflow coming into a mutual fund does.

When a client is actively trading ETFs, it doesnt have a negative impact on the overall fund. It is actually a very positive thing when we see institutional clients actively trading ETFs, because all it does is increase the volume over all in the ETF, which makes the execution costs for the retail client even better.

Burns: We discussed earlier, or you discussed earlier, that an ETF isnt always right or a mutual fund isnt always right. When is an ETF right for an investor?

Genoni: One of the big differences is cost. Certainly ETFs tend to be slightly lower cost than most mutual funds. All that said, again, you have to think about some of the other fees like bid ask spreads, execution fees. Does the ETF trade at a premium to the NAV? Or does it trade under NAV. There are a lot of factors you have to think through.

Burns: Well Rick, thanks for joining me today and discussing Vanguards take on the ubiquitous question of mutual funds versus ETFs.

Burns: Im Scott Burns with Morningstar. For this, and other ETF commentary please check out s ETF Center and Morningstars ETFInvestor Newsletter.

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