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By Scott Burns | 03-10-2010 11:41 AM

Vanguard Readies an Actively Managed Bond ETF

Vanguard's Rick Genoni discusses his firm's plan to meet investor demand for increased gradation in bond ETFs.

Securities mentioned in this video
BND Vanguard Total Bond Market ETF
Related Links

Scott Burns: Talking Fixed Income Bond ETFs with Vanguard. Hi there. I'm Scott Burns, Director of EFT Research with Morningstar. Joining me today is Rick Genoni, head of Vanguard ETF products. Rick, thanks for joining me.

Rick Genoni: Thanks, Scott.

Burns: Fixed Income Bond ETFs, in 2009 they led all ETFs in new product offerings. They led all ETFs in fund flows. You guys launched, in November, a whole new suite. What's the outlook for Fixed Income Bond ETFs right now?

Genoni: We launched seven new bond products, bringing our total lineup of Bond ETFs to 12. All are based on Barclays Capital US Aggregate Bond Market. It's three corporates, three governments, and one mortgage-backed.

All seven new products have done very well, in terms of cash flow. All are trading very well with very reasonable spreads. I think we're going to keep seeing interest in the market overall.

Burns: Just so viewers know, you have the ubiquitous Bar-Cap Aggregate Bond Index and you had a set of slices of it. You have Total Bond, of course -- Vanguard Total Bond, BND is the ticker. Then you had some slivers of that, and now you are filling in the slivers further down as we go in the org chart of Vanguard -- or of the Bar-Cap Total Agg Bond.

Genoni: What we basically did is we took our short-, intermediate-, and long-term government credit products and split them down into governments and corporates, separately.

We're seeing more and more interest from clients in using these bond sectors rather than simply using broad-based bond products. They're layering them on for different strategies; either to hit a certain spot on the yield curve, to adjust duration, to equitize cash, many different strategies.

Burns: Not only have Bond ETFs been leading in flows in new product proliferation, but they've also been leading the ranks in terms of bad headlines; a lot of it having to do with tracking error. How have the Vanguard products been performing?

Genoni: All of our products are tracking very tightly to the benchmark. Vanguard's multi-class structure allows us to own a broader set of the underlying bonds in the benchmark. At the same time, publishing a trading basket that's optimized against that set.

We really serve the best of both worlds. A basket that's highly tradable, while also offering a product to our clients that tracks very tightly to the benchmark.

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