Vanguard’s decision to ban trading in 11 newly minted spot bitcoin ETFs on Jan. 11 generated a maelstrom of criticism from surprised investors. Still, a Morningstar executive said the firm made the right decision.
“Naturally, this decision angered bitcoin enthusiasts, but it delighted me," John Rekenthaler, Morningstar's vice president of research, said in his latest blog.
The company's decision to ban spot bitcoin funds from its trading platform reportedly caused anger and confusion among investors, many of whom put money into their Vanguard accounts specifically to buy shares in the funds.
Instead of confirmation on attempts to trade in the investments, startled investors got a message in a pop-up box that day that stated, “Trade cannot be completed. Buy orders are not currently accepted for this security. Securities may be unavailable for purchase at Vanguard due to a number of variables including restrictions, corporate actions, or various trading and/or settlement limitations.”
Many argued that the Vanguard should have given investors advance notice of the ban before the highly anticipated spot bitcoin ETFs started trading.
But given Vanguard's history, the decision should not be surprising, Rekenthaler said.
"Throughout its history, Vanguard has often refused to go where others had trod,” he said, rattling off the names of other funds that Vanguard has refused to carry.
Among the funds that Vanguard has avoided are the following:
• Government-plus funds, a go-to for much of the industry in the mid-1980s. The funds supplemented their “income” by selling call options on their bonds, which generated capital gains for investors.
• Tactical-allocation funds, which, unlike more traditional asset-allocation funds, touted their finesse in their ability to sidestep the next market meltdown following 1987′s Black Monday.
• Short-term multimarket income funds, a 1990s phenomenon that combined fixed-income and equity investments to generate short-term capital gains.
• Internet funds, which Rekenthaler said mirror the hoopla surrounding AI funds today.
“All of the above crashed and burned,” he said.
Government-plus funds “failed so badly that it hibernated for 30 years, before being revived recently as 'covered call' bond funds,” he added.
While Vanguard could have generated revenues selling the funds, in each case, the firm declined to do so. Those decisions “benefited its business far more than collecting a few billion dollars of incremental assets. Investors realized which fund companies had burned them—and which hadn’t. Over time, they might have forgotten the details. But they remembered how they had been treated,” Rekenthaler said.
While Fidelity and Schwab also steered clear of such funds, they launched no-transaction-fee fund platforms that gave investors flexibility, albeit with higher underlying fees, he said.