BC: You said during a panel on Treasury market functioning and liquidity in September that some primary dealers “closed and were not willing to make markets” in March 2020. Did the pandemic reveal market-structure issues that need to be addressed?
SD: That was a liquidity crisis, not a credit crisis, and the speed and the scale with which things unraveled was truly unprecedented. Even off-the-run Treasuries were experiencing challenges, so that tells you they were extreme circumstances. When the largest, most liquid, enduring market is having troubles, that’s what we call a crisis.
We put a lot of liquidity in our funds so we didn’t have challenges meeting redemptions. Dealers were less willing—maybe less able—to commit balance sheet and warehouse risk for any period of time. Historically, dealers have been the buffer. You look back to the last crisis, where you could balloon up a balance sheet to warehouse some risk and trade out of it over time. The ability to have that flexibility has waned.
BC: What’s behind Vanguard’s big push into active bond mutual funds and ETFs?
SD: People sometimes are surprised when they learn we have over $1 trillion in AUM in active fixed income, across taxable, munis and money-market funds. We have been growing our capabilities, in particular in emerging markets, high yield and mortgage-backed securities. Along with growing our capabilities, we’ve also increased fund offerings. Our Core Bond Fund recently hit the five-year mark with a strong performance record.
We’re now ready and have filed to launch both a Core-Plus Bond Fund, which will be open to new investors in October, and a Multi-Sector Income Bond Fund, which we are running in-house for now but hope to open to investors in the near future.
We’ve also been increasing our presence in ETFs. We recently launched two new ESG-screened corporate bond ETFs, one in the U.S. and one in Europe. In April, we launched an active ultra-short bond ETF that has already crossed the billion-dollar mark.
Our motivation behind all these decisions is just contributing to more complete and stronger product lineups. Our measure of success is related to whether the product is helping investors meet their financial goals. In the case of active, this means generating consistent alpha and great risk-adjusted returns.
I’d also add that our goals at Vanguard are to help all investors, not just Vanguard investors. So if by entering new active markets, we not only deliver strong performance—which we have—but we also drive fees down across the industry, we consider that a win.
BC: Has passive fixed income gone as far as it can go?