Vanguard has launched 14 exchange-traded funds in an attempt to capitalize on what it believes is a hot product, and the move also will add broker-dealers to its bank distribution channel.
The nation's No. 2 mutual fund company has $20 billion of fund assets from bank sales, almost all through trust departments and none through banks' broker-dealers because of Vanguard's refusal to pay for distribution.
But now, thanks to the exchange-traded funds introduced Friday on the American Stock Exchange, bank brokers will be able to sell the name "Vanguard," one of only a few big fund company brands unsullied by the continuing mutual fund trading scandals.
An exchange-traded fund is a security that trades intraday on stock exchanges at market-determined prices. Investors may buy or sell exchange-traded funds through brokers just as they would the shares of any publicly traded company.
So bank brokers can sell any of the Vanguard funds, nicknamed "Vipers," said Martha Papariello, a principal in the institutional investments group at Vanguard.
"We will go out and educate banks, wirehouses, and investment advisers and help them understand the products and why they should consider selling them," Ms. Papariello said. "We will be calling on the bank channel, for sure."
Ms. Papariello said Vanguard has a sales team of 12 that is dedicated to the intermediary market. Eight of the 12 were hired in the last six months. George U. "Gus" Sauter, a managing director and the chief investment officer at Vanguard, said exchange-traded funds are a way for the company to expand nondirect sales. "One of the great things about this company is, we do not pay for distribution, and that's sacred to us," he said. "That's not going to change."
Therefore, bank brokers and other investment advisers have been left with no financial incentive to sell Vanguard funds, though many investors ask for products from the company or from Fidelity Investments, the No. 1 U.S. mutual fund firm and another one so far untainted by scandal.
The lack of a sales incentive was an issue at FleetBoston's Quick & Reilly, said its former president and chief executive officer, Peter Quick. He said customers often asked for Vanguard products. "But we didn't have a distribution agreement with them; it was a problem," said Mr. Quick, now the American exchange's president.
Now Vanguard can get on broker-dealers' product lists without paying for it because the brokers are compensated by the investor just as if they were selling any individual company's stock, Mr. Sauter said.
The market for the product "has jumped from $100 billion to $150 billion in the last year, though part of that growth comes from the stock market growth itself," he said. "But I believe we're only scratching the surface. Right now, the industry is predominantly institutional. But investment advisers are starting to look at this, and I think our entry into the marketplace is quite a statement. Our brand recognition in the individual market is very strong, and we think that's where a lot of the growth in this industry will come from."
Before the 14 funds' launching, Vanguard had two exchange-traded funds. "With the two, it was like saying, 'You can have any car you want, as long as it's black,' " Mr. Sauter said. "We weren't going to have much of a market force with two products."
Vanguard has six more exchange-traded funds on the way, for possible introduction this spring, he said. Exchange-traded funds in general averaged 53% growth last year, according to Standard & Poor's. Sales have grown as brokers shifted from commission to fee-based compensation.
The American exchange lists more than 130 exchange-traded funds. Its oldest such portfolio, the Spider Fund, has tracked the Standard & Poor's 500 stock index for 10 years, accumulating $40 billion of assets. It is the market leader.
Fidelity has an exchange-traded fund, launched through the Nasdaq in October.
