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Hello and welcome to Morningstar. I'm Emma Wall, and joining me today to talk about ETFs
suitability for these volatile markets is Mark Fitzgerald, Head of Product, Europe for
Vanguard. Hi Mark. Hi. So we've just heard from you at the Morningstar Investment Conference
about ETFs and about the volatility they were experiencing in markets at the moment. And
there is a school of thought which suggests that ETFs are actually contributing to this
volatility. What do you say to that? Well, it's important to remember that the vast majority
of ETFs are actually index vehicles, 99% are index vehicles. 91% in the European space
are UCITS regulated, that means they follow the same diversification rules and regulations
as other mutual and pooled funds. And ultimately, what most of those products are designed to
do is give you exposure to the broad market. You know the benefit of an ETF is you trade
once and you gain this exposure to hundreds or maybe thousands of securities. And Vanguard,
what we would say is, we value long-term investing. We see the benefit in sort of setting your
objectives and being disciplined, and to a certain degree the day-to-day noise of volatility
is not to be concerned, you shouldn't concern yourself with it, because you should be thinking
long-term, buy and hold. I suppose they also add liquidity, don't they? Rather than a lot
of volatility is caused by inaccessible markets, people investing sentimentally because they
are scared that they not be able to access certain assets. Whereas ETFs, because of the
nature, because they are traded like a stock on an exchange actually add liquidity to markets
which probably need it. That's a very good point. So fundamentally, an ETF is a wrapper.
It trades like a stock, it's a fund and it's a function of the marketplace. It's a reflection
of the marketplace, that's why you buy it. So, it doesn't create volatility. It reflects
the market. Now what it does do and what they do, do very successfully is they add a layer
of liquidity and by that what we mean is that if you look at the most traded ETF, both in
Europe and the U.S., 99% of the trading is secondary market trading, so that's investor
to investor. The fund assets are not touched and that's quite different from mutual funds.
So that's another layer of liquidity and that can help in volatile market and it can help
in times where there are liquidity concerns, because of that the structure of them is to
benefit. So, we've declared the product not guilty, but what about the investors because
there is evidence to suggest that actually ETF investors hold investments for shorter
period of times than perhaps active management mutual funds and because of the speculation,
because of the nature of which they are investing, actually their risk to crystalize losses because
that dipping in and after the market, they are increasing trading cost themselves and
as we all know market timing is incredibly hard to do. So how do we manage that element?
Again, it's a good point and Vanguard doesn't – because of its buy and hold nature and
the advice we don't advocate market timing incredibly difficult, it's almost impossible
to do. The nature of ETF is that if you look in the U.S. which is much more mature, much
more developed marketplace, the split between retail and institution was about 50-50. They
have their equivalent of RDR before us. Now what we found is the concentration on cost
is we would expect there to be over time greater emphasis on index funds and ultimately ETFs
in the retail market. At the moment though in Europe, you could say may be 85% of AUM
in ETFs is held by institutions and so they do have different trading patterns. Now many
of them all buy and hold, they are big institutions sovereign wealth funds that type of thing
and they have a buy and hold nature. But there are some of the market participants who will
use them for more tactical purposes, and that's part of the flexibility that an ETF offers.
But you don't have to use it like that and we wouldn't advocate using it like that. And
I believe your founder Jack Bogle has said often that people need to vote with their
feet and indeed that they have done in America because fees are the only reliable predictor
of future returns and so unless active management comes way down people are going to just move
across to ETFs. Yeah, and that's the thing there. So, one of our key messages, the discipline,
the long-term nature, buy and hold and control what you can control, i.e. costs. And the
more participants you have the more product, it gets competition, you've seen price compression,
seen it in the U.S., you've seen it in the European space, in the U.K. space in mutual
funds and ETFs and we would expect to see that continue. And that's to the benefit of
investors because of the nature of the impact the costs have, every little you save compounds
over a long period of time. Mark, thank you very much. Thank you. This is Emma Wall for
Morningstar. Thank you for watching.