Low-cost ETFs beat stock-picking, says Vanguard head

Why price factor still trumps passive-active argument

Low-cost ETFs beat stock-picking, says Vanguard head

Atul Tiwari has vowed to continue ETF giant Vanguard’s battle against high-cost management fees.

The managing director and head of Vanguard Investments Canada said rather than frame the debate as a passive versus active head-to-head, the client-owned company believes it simply comes down to low cost versus high cost.

While that view won’t surprise too many Canadian money managers, Tiwari stressed the combination of high fees and the pressure to beat the market makes the low-cost ETF a better long-term bet.

Speaking to Wealth Professional at the Radius Exchange Traded Forum yesterday, he said: “If you set the client’s allocation and you’ve got a sleeve of Canadian equities, the next decision is, how do I access that? Well you can do it the old way and try to pick stocks and beat the TSX 60 every year or there’s a number of other ways to do.

“What we would say is, do it through a low-cost instrument. In our case, we would say a five basis points ETF because over the long term five basis points against the return of the benchmark for 10-20 years? You are going to do way better than trying to pick the stocks that are going to win yourself, or by a 2% mutual fund.”

He added: “There are a lot of really good money managers out there who can pick stocks. The problem is when you start charging 2% or 2.5% every year; it’s hard for that active manager to consistently beat the benchmark. But if you charge something a lot less, suddenly that active manager has a chance to outperform [the benchmark].”

Tiwari said he didn’t see Vanguard’s approach as particularly aggressive but admitted that the firm’s client-ownership model makes them fiercely protective of that structure. With $5 trillion in assets under management globally ($1 trillion of which is active), Tiwari said their advice to investors remained relatively straightforward: get your asset allocation down and stay the course.

He said: “We’re big believers in the approach to investing of setting your asset allocation to meet your objectives and goals – so we try not to get caught up in the noise of the day.

“We think as an investor you set your goals, you get your asset allocation down, and then within the asset allocation use, in our view, the lowest cost, best product you can to achieve that particular objective. Rebalance on a disciplined basis, whether that’s once a year or twice a year and stay that course until such time as your goals change.”


Related stories: