What Investors Should Know About Vanguard ETFs & Fidelity Share Splits - Adviser Investments

What Investors Should Know About Vanguard ETFs & Fidelity Share Splits

Vanguard Shifting Focus to Traders with Expanded ETF Selections?

Vanguard’s made its bones providing low-cost investments for long-term investors. Is it now trying to promote trading rather than investing?

Last week, the firm announced it will offer its brokerage platform clients a significantly expanded list of transaction-free exchange-traded funds (ETFs). The selection includes products from competitors Schwab, iShares and State Street among others.

“Vanguard wants to be the premier provider for long-term investors who want the flexibility to hold [ETFs]…” according to Karin Risi, who runs Vanguard’s retail investor department.

But at the same time, its announcement notes that it is investing in its brokerage platform in order to “enhance the online experience and trading capabilities.”

Which leaves us to wonder: What’s the story here? Investing? Trading? Something else?

Let’s put this into perspective. While Vanguard can now claim bragging rights for putting 1,800 ETFs into its commission-free trading system, the fact remains that more than half of all ETF assets resides in about 40 to 50 ETFs, and the 1,500 smallest funds account for only a third of total ETF investments in the U.S. That means that 85% or more of the ETFs Vanguard is offering up for free trading are just that—ETFs for trading, not investing (at least if we go by investor behavior and preferences to date).

Vanguard Founder Jack Bogle has often likened ETFs to an elegant shotgun, useful both for hunting, but also for inflicting serious self-harm. Giving more investors the option to trade more ETFs without commission could mean that Vanguard is handing shotguns to a bunch of novices. While there are some time-tested momentum-based tactical trading strategies that have shown they can effectively grow wealth or manage risk for investors over time, it’s our experience that the success rate for do-it-yourself traders is low, leaving us skeptical that Vanguard’s expanded ETF supermarket is a true value-add for most of its brokerage clients.

This move may also be a tacit acknowledgment by Vanguard that it’s losing the ability to cut fees on its own funds and ETFs, and is looking for other means of attracting sticky assets. While the new ETFs are commission-free, they may attract new clients to the brokerage platform, where they will be exposed to Vanguard’s offerings for its fee-based advisory services and eventually become clients. In that light, this is a great marketing move, if nothing else.

But given all of its acknowledged service problems, the notion that Vanguard is now going to add even more complexity and encourage trading on its brokerage platform does not fill us with a lot of optimism. Long-term investors lose if Vanguard’s systems aren’t up to snuff, and based on what we hear from a lot of Vanguard investors, they aren’t.

It remains to be seen if the move pays off the way Vanguard hopes it does. From an investor’s perspective, we think it’s better to have access to high-quality investment choices rather than a large quantity of mediocre to poor ones. The longer list of ETFs may be overwhelming and make it more difficult for the individual investor to sort the good from the bad.

Tech Glitch Delays Fidelity Share Splits on Several Prominent Funds

For all of the catch-up Vanguard’s technology has had to do during the firm’s meteoric growth, its rival Fidelity’s reputation as a tech leader has been well deserved. But a recent snafu found the Boston fund giant with egg on its face and inundated with calls from confused and upset clients.

As we covered in April, Fidelity announced plans to conduct 10-for-1 share splits for several of its funds. (A full list is in the linked article.) The splits, which would not affect the value of client holdings, were scheduled to occur in two groups. The first wave of share splits on May 11 caught many shareholders by surprise, especially after clients’ online accounts adjusted the net value of each fund to represent the split, but failed to update their share counts. The result? The online platform incorrectly showed a 90% decline in the value of those holdings. Oops.

This week, Fidelity announced that it had pushed back the splits from the original June 3 date to August 10 on some of its most prominent funds, including the $129.4 billion Contrafund, $44.9 billion Growth Company and $17.5 billion Magellan funds. Fidelity attributes the delay to needing the time to fix the technical issue that alarmed many clients during the first round of splits.

The following funds will split on August 10: Contrafund, Growth Company, Magellan, Select Biotechnology, Select Chemicals, Select Defense and Aerospace, Select Financial Services, Select Health Care, Select Leisure and Select Technology.

As we mentioned last time, the decision to split these shares is an operational one, has no tax implications and will not result in a change in value of the investments for those who own them.

Clearly, Fidelity does not want its clients to have a poor repeat experience with the funds still scheduled for a split, so holding off until they are sure they can get it right seems like the best move. Now they just need to follow through and get it right this time.

Adviser Investments Once Again Named to FT 300

We’re thrilled and honored to have been named to the Financial Times’ list of the nation’s 300 top independent registered investment advisers once again in 2018. This marks the fourth time in five years that Adviser Investments has appeared on the FT 300, and we would not have been able to achieve this accolade without the loyalty of our clients and the hard work and excellent service provided by all members of our team.

Read more about Adviser Investments’ recognition on the FT 300 here!

Please note: This update was prepared on Friday, July 13, 2018, prior to the market’s close.

About Adviser Investments

Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the fifth consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2017. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015, 2016 and 2018.

For more information, please visit www.adviserinvestments.com or call 800-492-6868.

Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance.

The Financial Times 300 Top Registered Investment Advisers (2018) is an independent listing produced annually by the Financial Times (June 2018). The FT 300 is based on data gathered from RIA firms, regulatory disclosures and the Financial Times’ research. The Financial Times invited over 2,000 firms to be considered for its list; 760 responded. The listing reflects each practice’s performance in six primary areas: Assets under management, asset growth, compliance record, years in existence, credentials and online accessibility. Neither the RIA firms nor their employees pay a fee to the Financial Times in exchange for inclusion in the FT 300.

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