Vanguard

History of Vanguard ETF’s

Established in 1975, Vanguard started out as a mutual fund investment firm. From the beginning they approached the market differently than other mutual fund suppliers. Today they have around 3 trillion US Dollars in managed assets.

It still has a significant mutual funds portfolio being the largest issuing firm in mutual funds in the world. But Vanguard has also made  a large commitment in ETF’s. They are the second largest provider of ETF’s in the world after BlackRock’s iShares.

Vanguard – The early years

In the beginning of the 1970’s John Bogle was leading the Wellington Management Company. The seventies weren’t the best years for investing, markets went down and making a profit from investing wasn’t an easy case.

In 1975 Mr. Bogle had to leave his position as leader of the group due to a decision that turned sour. He was allowed to start a new fund however but not one that was actively managed. That is why he started a passive fund that only tracked the Standards & Poor 500.

The large part of actively managed funds never were able to beat indices, a truth that was inconvenient but authentic then and now. By leading a passive fund one is able to keep costs very low and performance was never worse than the index it tracked.

Keeping costs low – The Vanguard attitude

Mr. Bogle believed that lowering costs would be essential for successful funds and he was right, although it took many years before customers came flocking in. Of course here we already see the reason why Vanguard  would become a fierce promotor of ETF ‘s as ETF’s are not actively managed products, they also just track a market, index or commodity.

A different approach to investing

Vanguard approached investing through mutual funds from a different angle. First it did not actively manage the mutual funds. Second an even more importantly Vanguard opted not to have exterior owners. In general, mutual funds are owned by a company and/or shareholders in that company.

They all need to have a slice of the pie adding to the running costs of the fund. Vanguard took investing in mutual funds to an entirely different level. Here the fund shareholders were 100% owner of the mutual funds and they in turn owned Vanguard.

This was a complete reversion of the ways mutual funds were operated and managed. It sliced costs and it gave ownership directly to the investors of the fund.

Parallels with ETF investing

Again here we see parallels with investing in ETF’s where individual investors own the ETF they hold and are able to hold or sell it when the owner sees fit. Vanguard was already a 100% customer orientated investment firm even before that was considered an issue. In those days the only thing fund managers and owners were interested in was return on investments.

Entering the ETF market – A logical step for Vanguard

In 2001 Vanguard issued its first ETF on the market. An ETF is another form of a pooled investment just like mutual funds which originates back to the first investment trust established in 1774 in Amsterdam by Adriaan van Ketwich, a Dutch merchant.

Since 1774 funds evolved from closed trusts to open mutual funds and eventually ETF’s. For Vanguard stepping into the ETF market was a logic thing to do. It was a direct descendant of the First Index Investment Fund created by Vanguard’s John Bogle that just tracked the S&P 500 without any active interference.

Vanguard, not the inventor of ETF’s

Maybe it was a bit strange that Vanguard would not be the first provider of ETF’s but when it started out in offering ETF’s it did so with fervor. But perhaps it was a sensible thing to first wait and see and then offer ETF’s under the same approach as it did with mutual funds: keeping costs as low as possible while creating just the right ETF’s people were waiting for.

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