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Vanguard Readies an Actively Managed Bond ETF

Scott Burns

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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Burns: You know, in addition to it seems matching up very well against the competition in terms of tracking, how well are the Vanguard Bond Funds matching up in the terms of expense ratios.

Genoni: All seven new products were launched with 15 basis point management fees, versus the industry average of 29 in the ETF marketplace. In the mutual fund marketplace, over 103 basis points, so these are very low cost products for the market.

Burns: Now, I have to ask. There are mutual fund versions of this? How does the ETF expense ratio compare to the mutual fund, at least the retail share class for the sibling Vanguard product?

Genoni: The ETF class is slightly lower cost than the standard retail class of the same fund.

Burns: It sounds like a very powerful launch and you do have actually another product on the way, too -- an active TIPS fund.

Genoni: We do, yes. It is a product that will be fully transparent to the fund holdings. We are awaiting approval from the SEC, which we hope to get in the next couple months.

It's certainly a product that we've had quite a lot of interest in from clients. It is a current product that Vanguard offers in the marketplace. It's very well-known, so this will be simply a share class off that same fund.

Burns: Does Jack Bogle know you guys are doing active management?

Genoni: I'm sure Jack knows we're doing active management.

[laughs]

Burns: Well, Rick, thanks for joining me. I'm Scott Burns with Morningstar. For this and other ETF commentary, please check out Morningstar.com's ETF Center and Morningstar.com's ETFInvestor Newsletter.