Acquired
02:00:20 · Ben Gilbert, David Rosenthal
[02:00:20] S0: I am a Vanguard customer, and I think a 100% of the way that I am a customer is through their ETFs, not through their mutual fund products. And the mutual funds are everything we've talked about up until this point. [02:00:32] S1: Yep. Yep. So, Jack, had a real point of view on ETFs. And in fact, he had the opportunity to launch ETFs. So back in 1992, a man named Nathan Most had come to see Jack at Vanguard. Nathan was the VP of new products at the American Stock Exchange, and he had had the idea to create exchange traded funds as a new product, a new trading vehicle that would allow effectively shares, quote, unquote, of mutual funds to trade on stock markets in the same way as individual stocks, a stock exchange traded mutual fund, an ETF. And he thinks, of course, naturally, the very best fund to partner to launch this idea with would be the newly, you know, kinda crowned jewel of the mutual fund industry, the Vanguard five 100 index fund. And you [02:01:34] S0: might think Bogle's gonna love this. Like, what is an ETF? It's an even easier way to buy into something that looks basically like an index fund. And if you're trying to go direct to your customers the way that Vanguard does Yeah. Without the sales loads and everything, then great. They should be able to buy it right on an exchange.
02:01:34 · Ben Gilbert, David Rosenthal
[02:01:34] S0: might think Bogle's gonna love this. Like, what is an ETF? It's an even easier way to buy into something that looks basically like an index fund. And if you're trying to go direct to your customers the way that Vanguard does Yeah. Without the sales loads and everything, then great. They should be able to buy it right on an exchange. [02:01:52] S1: Easier distribution available to more of the investing public. What's not to love? I mean, that was that was Nathan's view. He was a real idealist about this. Yep. Hey. We're gonna vastly expand the distribution reach and the target audience for mutual funds and allow anybody who can place a trade on a brokerage to buy into a mutual fund, and he was absolutely right. [02:02:16] S0: And there's some other structural benefits too. There's the idea that you're not affected by other people in the fund. So if someone else decides to sell a bunch of their shares, I don't end up getting a a big tax hit from [02:02:28] S1: it. Yep. [02:02:29] S0: Then, of course, there's the you actually do know the price that you are getting because since it's traded on an exchange, when I decide to make an investment in that fund, I buy it right here, right now at the market price. I'm not waiting till the end of the day to figure out the mutual fund is gonna be priced at. So ETFs have lots of great things about them. [02:02:47] S1: Lots of great attributes. Jack hates this idea. He absolutely hates it, and he basically tells Nathan Most to get lost.
02:02:47 · David Rosenthal, Ben Gilbert
[02:02:47] S1: Lots of great attributes. Jack hates this idea. He absolutely hates it, and he basically tells Nathan Most to get lost. [02:02:57] S0: And why does he hate it? He hates it because it's exchange traded. Yep. He thinks, well, that for that very reason that I love it, that you know the exact price that you're buying it, it means you could trade in and out of it all day. You could do the worst possible sin of investing, which is incur a bunch of trading costs, speculate on it, not be a long term owner, and just try to do intraday arbitrage. [02:03:21] S1: Yep. [02:03:21] S0: And that particular thing that he thinks that's gonna cause all of these behavioral issues, even though the intrinsic product has all these great characteristics, he thinks the temptation for people to do that is so bad that the product shouldn't exist. [02:03:37] S1: Well, I think there's two other related things that he's really worried about beyond just that temptation in and of itself. One is that the brokerage platforms are gonna incentivize trading because this is how they're gonna profit from mutual funds. [02:03:53] S0: Because at this point in time, Robinhood didn't exist yet. Fees hadn't dropped to zero on transactions, so you actually were paying very meaningful amounts. For in recent memory, it was single dollar, but it used to be, like, 50 plus dollars to place a trade on an exchange.
02:04:08 · David Rosenthal
[02:04:08] S1: Yep. So if you're a prospective competitor to Vanguard and you wanna offer competitive, you know, index funds at similarly low cost, well, all of a sudden, if you can now make a bunch of profits on trading in and out of ETFs in those funds on your brokerage platform, that's a way to make money here. Yep. So Jack hates that. He also hates that because these funds will now be traded on an exchange, it means that you can short sell them. And he thinks this will just be like a absolute disaster for the financial industry. You know? And, hey. Look. Like, I would definitely not recommend going and short selling at the S and P 500. That has historically been a losing game in the long run. But look. This is a product people want, and shorting indexes like the S and P 500 is like a core part of many hedge funds strategies today. This is an idea whose time had come with all the good and all the bad, and it needed to exist. So Jack turns it down, and not just turns it down, but like he hates the concept of ETFs. Nathan goes on to launch the world's first ETF with a new asset management division of a old Boston bank named State Street. And you've probably heard the State Street name today. You might have heard of the SPDR. SPDR. Well known SPDR, Standard and Poor's Depository Receipts Trust, which is the listing for State Street's S and P 500 ETF, which until recently, like a year or two ago, was the largest ETF in the world until it was surpassed by Vanguard and BlackRock after Jack's time. Well, after Jack's time. So, yeah, this was a really bad decision by Jack to pass on ETFs. Today, ETFs are a huge part of the mutual fund industry. They are still only about half the assets in aggregate of traditional mutual funds, but ETFs are growing at, like, 30% per year while mutual funds are flat. So if that keeps up at some point here in the next small set of years, ETF assets will pass traditional mutual funds to become the, you know, largest equity asset class in the world. Yep. So listeners, why
02:06:32 · Ben Gilbert, David Rosenthal
[02:06:32] S0: does this matter? Why are we explaining the difference between ETFs and mutual funds here on acquired? I think the most interesting reason is that it was the thing where it was clear that the founder really should hand over the reins. This should not have been a sticking point. This should not have been even a decision for the company. This was clearly the right thing to do long term. And whether or not you understand the mechanics of a mutual fund versus an ETF, and and we dramatically oversimplified and skipped some things. It is just so perfectly illustrative of this point of [02:07:04] S1: Vanguard had to get into ETFs. Yeah. [02:07:07] S0: And that purity of the founder is is the thing that is required to start the company, but typically not sufficient to scale and keep them globally relevant. [02:07:17] S1: Yep. Yep. [02:07:18] S0: And we see this in Ferrari with Enzo. You see this with Apple, the Steve Jobs, Tim Cook. You see it in the NFL, with Coca Cola, with Trader Joe's. I mean, this phenomenon just shows up over and over again.
02:07:18 · Ben Gilbert, David Rosenthal
[02:07:18] S0: And we see this in Ferrari with Enzo. You see this with Apple, the Steve Jobs, Tim Cook. You see it in the NFL, with Coca Cola, with Trader Joe's. I mean, this phenomenon just shows up over and over again. [02:07:30] S1: Yep. Yep. And this is how it showed up in Vegard. So in August 1999, this finally comes to a head on the board. Brennan and the management team say we we gotta launch ETFs. We're so far behind. State Street is out to this huge lead. They're building all this market share in a S and P 500 index that we started this. This is our space to own, and our our customers, our clients are demanding it. Yep. Jack is staunchly against it. And so in August 1999, Vanguard announces that it is enforcing its mandatory board retirement age in the bylaws of 70. No board member can serve past the year in which they turned 70. Jack has turned 70 that year and that mister Bogle will be stepping down from the board at the end of the year in December. This is a big deal. This causes a huge public outcry. [02:08:28] S0: Also, there's someone older than him who is on the board that they don't enforce it for. [02:08:35] S1: Right. [02:08:35] S0: So it's not really about the age requirement. It's it's about the overstaying your welcome, but he is the face of a movement. [02:08:44] S1: Right. So unlike the last time Jack got fired where his former partners were probably hoping he would go quietly into the night, that's not an option here because [02:08:58] S0: He's a giant asset to Vanguard.