As the mutual fund industry faces a fork in the road — continue as they have been, or start giving serious consideration to exchange traded funds (ETFs) — they really only need to look for the answer in one place.
Ten years ago, Gus Sauter, then a managing director of Vanguard Group, sat up and took notice that one of Vanguard’s biggest competitors, State Street Global Advisors, was attracting tons of money using ETFs. Rob Wherry of SmartMoney.com says that Sauter decided Vanguard needed to get in on the action. The CEO initially nixed the plan and told Sauter it was the worst idea he had ever heard. Eventually, he was convinced and the rest, as they say, is history.
Vanguard’s 37 ETFs have pulled in a cool $41 billion since their launch in 2001. Sure, it’s a small portion of the company’s $1.3 trillion in assets, but the business is growing more rapidly than Vanguard’s more traditional offerings.
The Wall Street Journal surveyed the mutual fund industry and found that fund companies fall into three basic camps with their strategies:
- The first camp is made up of indexing specialists who view ETFs as a natural extension of their business. Some of these companies see landmines ahead, such as a price war that will bring ETF fees even lower than they already are.
- The second camp are mutual fund companies that are buying ETF expertise, as Invesco did when it bought PowerShares in 2006.
- The third camp are companies that are sticking to their guns, remaining confident that their expertise and stock-picking will continue to draw plenty of business.
As the ETF industry moves forward, it will be interesting to see what the different mutual fund companies choose to do and which ones come out on top.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.