A Chat with Vanguard's Jack Brennan

Vanguard has always done a good job of spelling out what it stands for: namely cheap index funds and low-cost actively managed funds with sober, long-term strategies. It has done such a good job, in fact, that the popular news media (and in turn a lot of investors) are often surprised or flustered when the family tries something new. They wonder how the new funds and initiatives comport with its reputation and whether they signal a break with the past.

Well, the family has tried a lot of new things recently, including expanding its index and exchange-traded fund lineup and making plans for a new market neutral fund. I recently talked with Vanguard chairman and chief executive officer Jack Brennan about these and other recent developments at the family, in the mutual fund business, and in the financial markets. Here's an edited excerpt from our conversation.

Q:In the last year Vanguard has launched new index funds tracking the FTSE All-World ex-U.S. Index, stocks with high dividend yields, long duration bonds for institutional investors, and planned to roll out new mega-cap equity index funds. In what other areas could we see Vanguard launch new index funds: perhaps in the international bond area or international style?

A: Potentially. For us, we want to have it be diversified, and we want it to meet an investor need. We actually feel pretty good about the way the lineup is arrayed today. Frankly, the advent of our domestic bond ETFs was important for our clients. As for international bond ETFs, we don't today offer international bond funds, so I don't see that yet. There is a good healthy debate on how international bonds can or should be used for American portfolios (laughs)--at least a good healthy debate at Vanguard.

Q:What is your view of the ETF marketplace right now and Vanguard's position in it?

A: We are proud of the lineup; they are the best value by a long shot, fund by fund, from category to category. As you said, that is where we want to be, we want to be the best value for people. As far as Vanguard's position, I'm very pleased with how our team has built out its capabilities to support the advising community and continue to develop funds that meet a real need like the bond funds and so on.

The ETF market is probably bigger than most people thought it would be, today. But I think the ETF has met a need�the idea that ETFs can be used to help meet specific client needs rather than (taking on) the very specific risk that comes with individual security selection. You see that in the market, that is why the market has grown as much as it has. I look at the ETF as a great addition to the arsenal for people from an investing standpoint.

Q:I've read that one of your favorite business books is "Only the Paranoid Survive" by (former  Intel (INTC) CEO) Andy Grove. What is making you paranoid now?

A: What makes me most worried, frankly, is whether this whole subprime mess has played out. I think the months of August and September were as interesting as we've had in a while�So, I want to feel better that leveraged strategies and other things have unwound. I'm worried about it with no specific reason to worry except that the last couple months have been very interesting.

Q:I noticed in looking at some Vanguard regulatory filings that you have money in  Vanguard Target Retirement 2045 (VTIVX). Should we read anything into that?

A: You want to know what to read into it? I don't think we had any other investors, so I put the money in (laughs). You may or may not know Gus (Sauter, Vanguard's CIO and indexing expert) and I were both born on the same day, so I sent him a note that said we are going to have a big bash on our 91st birthday. I'm taking the money out and we're going to do something fun together. I don't know where he'll be or where I'll be, but hopefully we'll both still be kicking, and we'll take the proceeds and do something extravagant like take ourselves out to lunch.

For the rest of my interview with Brennan and my analysis of it, see November's Vanguard Fund Family Report.

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