While looking at the growth curve for ETFs over the past two decades, which can almost be described as exponential, it is surprising to hear that ETFs still only represent about 10% of all investments. They represent an easy way to introduce portfolio diversification, provide broad exposure to sectors or markets, all while offering the investment industry’s lowest management fees. A convincing strategy indeed for passive investors. Nevertheless, ETFs are still relatively young, and have some maturing to do in the eyes of many investors.
As Cees Bezuijen explains in our exclusive interview below, ETFs have democratized the markets, and a main reason for why they are so popular today, but ETFs still need to find their so-called ‘sweet spot’ – which he believes will be even lower fees, and a more limited scope of products that are best-suited for the ETF category. Overall, Bezuijen says the future of ETFs will look much like their past, full of exponential-like growth.
Cees Bezuijen is a senior sales executive and the Deputy Head of Benelux, Nordics and Spain at Vanguard since 2011. Prior to Vanguard, he worked at a Dutch custodian bank for almost 14 years, the last six of which he was responsible for sales for Dutch pension funds and large insurance companies. Bezuijen started his career as an accountant, has a bachelor’s degree in economics and is currently pursuing an MBA with Drexel University, USA.
It has recently been the 20th anniversary of ETFs in Europe, what have been the drivers of their growth among investors?
ETFs have democratized the market, allowing the end investor to participate in the capital markets at costs that used to be only accessible to large institutions. ETFs are also transparent in their cost structure, so they are easily understandable to everyone. Nobody can control if markets go up or down, but the one thing the end investor can control is the cost he or she is paying for a product. And every Euro paid in cost is a Euro less in retirement. Moreover, investors can use an ETF really well for broad diversification: take our FTSE All-World Ucits ETF that has nearly 4000 underlyings across developed and emerging markets. Try to rebuild that with single stocks! And the same applies to our Global Bond ETF that almost has 5000 underlying bonds included.
What is the future direction of the ETF business?
There are a few trends I would reference here. Firstly, the cost aspect – costs will continue going to go down. Secondly, the aspect of which products should be an ETF and which should not. There are more and more very niche ETFs, for example for the narrow market for bank bonds. Such ETFs cannot keep the promise of always being well tradable in the long run. They run the risk of damaging the reputation of all other ETFs. But in a nutshell: ETFs will continue to rise as more and more investors understand the benefits of investing in a transparent, long-term oriented, low cost and broadly diversified product. However, in Spain the focus for retail investors and their advisors is more on funds given the rules around capital gains tax (traspasso).
Current market conditions and increased volatility have changed investor sentiment of late. What are the risks and opportunities in passive investing at the moment?
Any time is a good time for ETFs. ETFs replicate the performance of a stock market index such as the IBEX one to one. Regardless of whether prices fall, as they did at the beginning of the Covid-19 crisis, or rise as they did recently: for ETFs, any market situation is good, because the whole concept of these funds is based on giving investors the average return on the stock market – at the lowest possible cost.
How is the current crisis testing the resilience of ETFs?
It is fair to say I believe that the Corona crisis has tried and tested ETFs. The result: when almost nothing could be done on the markets in the worst days of the crisis, there were only two exceptions – government bonds and ETFs. With regard to the financial markets, I would say that ETFs are the heroes of this crisis, they truly passed the test. Our investors are a good example. We took a close look at how our customers behaved during the crisis from late February to late May. The result was: 90 percent did exactly the right thing, namely nothing. Seven percent even increased their equity position and bought cheap when prices fell. You have to remain calm and disciplined when there is unrest on the markets and, if possible, hold on to your own wealth distribution. Almost all of our investors have done that. Only 0.4 percent panicked and sold their ETF.
Everybody in the industry is talking about ESG investments. Are ESG-focused ETFs still a viable option for investors?
With more than 30 million investors globally who look to us to both safeguard and grow their investments, it’s essential that we assess risks and opportunities through every available lens. As such, our approach to ESG considerations is multifaceted. We consider ESG through the thoughtful way we evaluate the funds we bring to market, through the integration of ESG assessments in our investment processes, and through investment stewardship activities including company engagements across our funds.
What is the main value that Vanguard offers investors?
From the beginning of Vanguard, we’ve set out to serve the needs of those looking to build a better financial future. Our mission—to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success—guides every action we take and every decision we make. We aim to lower the cost and complexity of investing wherever we go.
Remember, what started as the “Vanguard experiment” 45 years ago, and what began as a novel idea—to have mutual funds directly benefit those who invest in them—has become a movement. Thirty million investors have found the Vanguard way of investing. They are keeping more of their returns, staying the course during turbulent times, and reaching their goals sooner.
Because we do not have a conflict of interest, because we are not stock exchange listed or belong to a family or a few individuals, we can safely say that our interest is our investors, who directly benefit from our mutual setup through constantly lowering our costs for example.
Where do you see passive investing moving over the next year? Will the current crisis affect this asset class on the long run?
Passive investing will certainly continue to grow. A good example: if you take a look at the percentage of the value of all globally investable securities owned by registered index funds, we are talking about 10%. So there is definitively room for future growth. In many European markets, also in Spain, passive investing is literally still in its early days, but we are very encouraged by the rate of adoption of passive and the resulting growth. The Covid-19 crisis should not affect this over the long-term. Indeed, the recent crisis is the ultimate case for having a broadly diversified, low-cost, and long-term approach to investing.