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By Jason Stipp | 10-03-2012 04:00 PM

Answering ETF Concerns

Vanguard principal and ETF strategist Joel Dickson responds to worries that increased passive investing has led to more market volatility and that ETFs cause investors to gamble with their portfolios.

Jason Stipp: I'm Jason Stipp for Morningstar, reporting from the Morningstar ETF Invest Conference 2012.

I am here today with Joel Dickson from Vanguard. He is a principal and an ETF strategist with the Vanguard Group.

We're going to talk about some of the concerns over ETFs and some of the research Vanguard has done to address those concerns.

Thanks for joining me, Joel.

Joel Dickson: Thanks for having me, Jason.

Stipp: I think ETF investing is in the news a lot because it's got a lot of assets, and we've seen a lot of assets moving to passive investments. What do you think are some of the tailwinds that are causing this move to passive investing among investors of all stripes?

Dickson: Well, I think there are a couple of things. First is the recognition of costs being an important determinant of long-term returns for investors, and it's somewhat unlike many other consumer products, if you will, where often higher price is a signal of quality. In the investment world, what you pay is what you don't get to keep, and so lower price can often be an indicator of higher quality, all else equal. You've seen a move towards lower-cost and in many ways passive approaches.

I think also a real, in many ways, seismic shift within the financial advisor community away from commission-based approaches to providing financial planning and financial advice to a fee-based model has really put a focus on the cost of the advice versus the underlying investments, and I think ETFs and low-cost funds generally are finding a sort of welcome home within fee-based financial planning models.

Stipp: At Vanguard, have you seen the percentage of your assets that comes from financial advisors has grown in that environment that you described?

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