 All right before we get started with the first event I'd like to introduce somebody in the audience and that is Mike Nolan Mike was Jack's assistant. A lot of you know Mike Mike was a Jack's assistant helped write how many books? At least four or five books and It's still still a vanguard and is my number one go-to guy for anything I need from vanguard including people to interview Which brings us to our guests today I have question though in the room. How many people here own a vanguard index fund? Okay, the fellow today who I'm going to speak with is your fund manager. So if you have any complaints Anyway, I am pleased we are so pleased to have Jerry O'Reilly as our speaker today He is a principal and portfolio manager at vanguard and he oversees the 1.4 trillion dollar Vanguard total stock market index fund, which is the largest mutual fund in the world and He also oversees 16 other funds of which I believe he said five of them have your name on it. So in total I believe About four trillion dollars is that rough estimate? Yeah, which is 10% of the value of the entire stock market guys important, right? So with no further ado, let me introduce Jerry O'Reilly, please come up to the stage Okay, good good to go. Well again, thank you for being here and my numbers were pretty correct right four trillion Yeah, yeah, so do you sleep at night? I do You know a lot of it is because I'm exhausted when I get home. So there's there's no problem there But yeah, I mean listen I I am the name person on there And I am surrounded with a phenomenal team that I work with and so You know, we have we have 25 people Rick that manage that for trillion and change With you know average tenure, I'd say about 12 13 years, which is unusual In terms of you know the tenure, but like when we hire people it's all about you know How are they going to work in that team environment? How are they going to work in terms of collaboration? I know that if I'm jammed on something there's like three four people I can go to to have them pick up the lead So we pride ourselves kind of in the team concept, but it is great. I mean you know, I started off entry level on the phones at vanguard and you know my my first Paste paycheck. I remember coming home and I said to my wife. Yep I said we're starting and she was working in a shoe store and I think you know I remember thinking well, it's it's a start. I got my foot in the door and within three years I was on the desk and I felt like this is what my passion. This is where my passion lies now You have an interesting background. So I'm gonna go back even before then and you were born and raised in Ireland Partly correct. I was I grew up in Ireland, but my my mom and dad. So my dad was one of 17 kids 17 1717 no twins grew up I have an aunt who's five years older than me My Aunt Mary and if you asked me to list all 17, I'd be I'd be stretched. I'd be here for a while But dad was grew up in a farm in Kells County me the outside Kells County me Probably some of you have heard of the book of Kells. So that's that's where you know Kels is And dad when he was in his early 20s someone locally had gone to Canada to work in a town called Uranium City, which if you look at a globe for Saskatchewan turns from green to white Saskatchewan uranium city is well up into the white so dad and four or five local 20 year olds went over there and that's where he made his money and my mom He came back and they got married and I was born in Uranium City, Canada Oh, is there and when I was two years old they brought me back to Ireland's and mom is from outside Kells, too and Yeah grew up in Ireland and then you know things well, okay, so You were a track star and you were recruited To go to college here in the United States. Yeah, and then you were actually an Olympic athlete. I was yes So about that So it was a few pounds ago Rick. I used to be 152 But that's what happens when you run, you know, 90 hundred miles a week training, but yeah, I mean I From 1976 was a pivotal year for me. I was 12 years old. So you guys are all doing the math now You're like, okay. I see what age is I Was watching the Montreal Olympics and there was a guy from Ireland who was like our LeBron James his name was aiming Coglin He was a runner He was at Villanova and he was favorite to win the 1500 meters and I had started running at that point And I was fairly good and I remember watching a documentary on Amon and seeing like hey, he's going to school He's Representing Ireland and he was a favorite as it turns out he finished fourth and it was great disappoint But I remember he just planted a seed with me thinking Man if I was good enough as a runner, I could actually get a scholarship I could you know potentially set me off for a career and I would go, you know, we lived out in the country back home And I would come home from school drop the bag off and the family was having dinner And I'd go out and run seven eight miles by myself on country roads And at the back of my head was this fueling me was this potential that someday Maybe I'll have an opportunity to get a scholarship and when I was a senior in high school I won the Irish national championships and all of a sudden I had 12 scholarship offers and my mom Being Catholic from Ireland. She's like Villanova's a Catholic school. That's where you're going And so that was the end of it. And so I ended up in in the fall of 83 Showing up at Villanova campus. Yeah. Well, I just have to I just have to because you did walk into the stadium at Seoul Korea Yeah, you know all those people in the opening ceremony. I mean just tell us just a just a little bit about that Yeah, I was fine until someone yelled from the stands that there's 200 million people watching you The thing about the Seoul Olympics and you can Google this They brought all the all the teams in and I was there was maybe a hundred people on the Irish team between You know all the different sports officials and everything else phenomenal the whole day just was incredible They bring you into the stadium and you line up in on the infield and of course It's time to light the torch that the cauldron and what they did was they released a couple of hundred doves as a sign of peace Mm-hmm, and where do you think that doves landed on the cauldron and then two athletes went up and lit the cauldron? And that's the last time the Olympic games have let off live birds It's it's not a pretty sight. I showed it to my kids on my daughter's jaw like she was 10 at the time And her face just dropped. He's like the birds But yeah, you can you can Google that but phenomenal experience at just you know, it's a 24 year old. Oh Incredible to be there and and then how did you get a job at vanguard? So There was a guy who Mike knows well who used to compete against me named Jim Norris and Jim ended up being He was an assistant to mr. Bogle for a number years He would have been involved in some of the earlier books where his Mike was involved in some of the later books Jim and I would meet at would race each other. He went to st. Joe's I went to Villanova there they're literally, you know four miles apart and I got to a point where in my career where I was I was making some money from running Rick But not enough to walk in and potentially, you know buy a house or even even buy a car And I remember thinking I need to find something a little more stable And you know vanguard was half an hour away and Jim was working there already And he said listen, I'll drop off your resume and that's how he got my foot in the door as I said as an entry-level Person on the phones and I'm within like a month or two. I knew that I was gonna be here for a while And it's interesting. You've been there for 31 years now 31 years in March Yeah, that's a real testament to me to vanguard because they hold their employees for so long. Yeah, I mean, I think When when we hire I mean when I interview people I'm not I'm not interviewing somebody that I want to be on the desk for two or three years I'm in or I'm hiring somebody that I can see 20 years 25 years down there Wow, so there's and I think vanguard does a really good job of making sure that you know Just the whole quality of just your your your work life balance is good. I mean You know, I have you know for kids and they're they're all in their 20s now But when they were you know eight ten if there was a dance recital a ball game I it was no problem for me to to run out and and catch that and and and you feel kind of like and then when you work with people like my Duke Gus Sorter and You learn from people like that and you just you know Gus was probably one of those guys the most humble Person and I know he's spoken to the to the Bogleheads on a number of occasions, but it's just contagious You like like I would have ran through a wall for Gus, you know that that type of person And it just I mean I just absolutely I tell people Interns who come by the desk looking for a little I say listen I'm 31 years at vanguard on a Sunday night, you know when I hear the 60 minutes Clock I'm like, okay works tomorrow. Awesome. I'm looking at the futures I'm figuring out what we're gonna be doing tomorrow, and it's just to me. It doesn't feel like a job well, Fanta, well, let's go ahead and get into the portfolio management, let's first talk about the vanguard total stock market Index fund 1.4 trillion. Yeah roughly just yeah get tied under. Yeah, and that that includes both all share class All share classes. Yeah, and I just for clarification Vanguard has a little different approach to ETFs versus mutual funds where it's all the same pool of money Yes, could you talk about that and how it's split up then yeah different level it is Yeah, so so in total stock market there we have you know the VTI share class We've Admiral share class with institutional share class to me It's all just one large pool of money which makes it easier to manage and there's also benefits to that multi-share class. So for example You know whenever there's corporate actions going on where you potentially have ads to the index if it's a standalone I would need to sell Basically to raise money to buy the stock that's getting added to the index But in total stock market at any given day, I could have 500 million coming in and cash flows. I could have corporate actions for example yesterday I came in in the morning thinking it was going to be a nice quiet day and all of a sudden Activision is halted and I have to spend 2.2 billion at the end of the day because I get $95 a share times all the shares of that of Activision I have and now I'm talking to Nasdaq about you know potentially Is it going to be halted all day? Is there just for the morning and what's the repercussions of that for all of the funds that we manage and you know from my funds I need to spend that cash and spread that across the rest of the 4,000 on securities in the index The share class also when we have redeems So if somebody does a create like I'm talking about APs who are doing dealing in $20 50 a hundred million dollars Authorized participants of the people who yeah Create and regain redeem so Rick when yeah when they Redeem we're able to give them the lower cost basis stocks So take a stock for example like NVIDIA, which is up what close to 200% for the year We can give them the NVIDIA shares that we have at low cost basis Which tends to make the fund more tax-efficient overall So I want to dig into that a little bit because you do they have this I call it a double-edged sword on tax efficiency of a fund like the vanguard total stock market fund if you have a stock that is That it went down in value. So the basis is higher and you're actually losing money You would redeem that for cash and take the loss in the fund You potentially have the option so you can basically determine when you're talking to our fund accounting Which shares do we want to you know hand out so potentially you could do that There are I mean the primary goal Rick is to you know make sure that we're tracking the benchmark But there are different tools available one would be you know the in-kind process The other would be potentially tax harvest at certain times of the year So names like for example that we might have a cost basis of here that are down here If you sell those names as long as you don't buy them back within 30 days because of the wash sale rule You're able to realize a loss. So we we do look to try and keep about a You know 170 to 200 basis points of a cushion of realized losses in the fund so that we're not distributing gains to the shareholders I think one of the big concerns is when you look at the data on Vanguard total stock market. It says unrealized gains And it would look like there's a huge huge amount. Yeah, and sometimes the media gets a hold of this And they said oh if people started selling this fund You're gonna get hit with big capital gain distributions Yeah, and but it's not really true is it no I mean it is something that we monitor literally on a weekly basis in terms of the capital gains And if we start to see that realized losses are getting below that kind of 170 basis points We start to take action on it and it's and sometimes it's like we have you know, as you mentioned the crisp indexes They do rebalances once a quarter. So if you think about it, we just had one in September If we sell names in the third Friday in September or during the five-day period if They're not large names in the fund and their fund their stocks that are we have a significant loss in the name We can just put those names on hold for a period of 30 days Now these might be stocks that have a weight in the index of less than a basis point But they could be very tax-efficient when it comes to realizing losses Okay, so the whole team that kind of works with us in terms of helping us identify what those names are and making sure that you Don't have any concentration in any industries or sectors where you you know if that sector rebound rebounded over the 30 days You would be hurt. So making sure we do it in a diversified manner. So on the mutual fund side You're able to take losses and build up these capital losses because you're gonna do it in cash Yeah, I'm gonna sell in cash but on the ETF side you're going if you have a big gain and you want to Push that gain out of the fund Without the shareholders incurring a capital gain you'll go through authorized participants. Yes, so explain that process I mean, how does that work where you are able to push this stock out and the fund itself not actually take the game Yeah, I mean, it's it's I think all index all ETF providers because of the in-kind mechanism where You know if you have a stock for example that has a significant gain if an AP comes in and does a Create and on the way out They receive that stock because it's done in-kind the NAV of the fund really has the gain in it and it's not Realized until a shareholder sells whether that's in six months. So it's just deferring the gain It's really what it's doing through the ETF mechanism. So the create then is this Basket of stocks that comes in from the authorized participant, which is maybe a JP Morgan or Goldman Sachs or somebody this whole basket of stocks comes in and They that comes into the fund You're not buying this this comes in through the ETF mechanism So they would give us the shares of the basket We would give them shares of the ETF and on the other side when they want to redeem those ETF shares They bring the ETF shares in and you have to hand out stock And the stock you give them is high cost basis hundred percent. There we go. Yep Okay, and that's how it becomes yeah more tax efficient even to the opened-in fund shareholders Yes, because it's all part of the same that is for the same cool of money. Yeah, very good I always thought that was fascinating. I read the paper that I think it was Gus wrote on this back I don't know two thousand or whatever it was. Well, you crew then you went out and got Patton on this Yeah, and now the patent has come off Expired and I think there are a couple of asset managers that are doing it. I think DFA is looking at it. Yeah Interesting. Well, very good. I'm curious We did mention the index so the index that the total stock market index fund tracks now is the crisp total stock market index In crisp is what we call a crisp It's the Center for Research and Security Prices, which is owned by the University of Chicago currently 3800 Stocks in that index, but it wasn't always that index I mean back in the day it was the Wilshire 5000 Yeah, and then it turned into an MSCI index for a while and then it moved over to the crisp index So these indexes do change once in a while. They do that's a huge Yeah Event yeah for your desk when an index changes correct correct and what do you have to do? How do you get it aligned? Well it lots of times So I remember those days Rick where we had the Wilshire 5000 and there were you know I think going from Wilshire to MSCI there were reasons that we had concerns about Wilshire which back back then I mean Index methodology has become somewhat commoditized now It's it's got little flavors on the margins are a little bit different But in terms of just the basic and Gus contributed to this in a paper he wrote back in the early 2000s as well But for example a simple thing like float So let's say for example, you know, you have a company a biotech company and the insiders own 80% So really there's only 20% of the shares outstanding are available to the public Wilshire would say no all the shares available to the public So when a name got added you had you had indexers trying to buy as if there was a hundred percent of the shares outstanding available And we would cause huge impact on these names So the idea of float adjustment came about and an MSCI had some things that we thought were desirable So we moved but when we move from one index to another It's a big deal and it oftentimes it takes months to convert kind of from your existing Here's your current index to the to the pro forma the one that you're heading towards it needs to be done I mean because ideally what you're trying to do is do it without realizing gains without having any kind of substantial tracking error and Crisp, you know when we move to crisp I think that was primarily for cost certainty So as you guys know like when I started at Vanguard, I think the average expense ratio was around 30 basis points And it's come down to on an acid-weighted basis now around eight basis points And I think Vanguard felt like hey if if we're offering Funds and we're you know giving investors the benefit of economies of scale because of our size We had this Index licensing thing out there that we felt like we need to get this under control for the long term So that we're not you know, like if you think about VTI, it's got a three basis point expense ratio It wouldn't make sense to be paying a licensing fee, you know close to that number So I think with Chris we got a long term where we got cost certainty and it also helped that Chris methodology We thought was best in class MSCI is still, you know really really good in terms we use it for the sector funds But as I mentioned a lot of the indexes have become somewhat commoditized now So you've got 3,800 US stocks in the crisp index of which you own all 3,800 Give or take yeah, there may be some at the very bottom desk side that just trade by appointments And that's where I actually want to go to yeah So how many of these 3,800 stocks are actually liquid? You could go out to the market you can buy them and how do you handle those trades? Yeah, and then how many of them are illiquid where you've got to handle them differently and then explain that process Yeah, great question. So I would say you know the top 1,500 names Very liquid no issues at all trading them if you have it like that list I mentioned yesterday For Activision when we had to spend all the cash from it when I generated trade lists around 3 o'clock yesterday I think I had 1,400 names and very very liquid names The issue and the time and the names that I spend most of the time trading Are the tail the exact names that you refer to Rick which are the ones in the bottom say three des 7 8 9 and 10 the ones that are very difficult and what we do there is every Monday morning We'll come in I'll run a 200 million dollar list of those names that are so we have the ability to basically say On our trading platform to say I want to generate a trade list But I want you to focus on the bottom four desiles And by desiles meaning so we rank them, you know one one through 10 The ones are the most liquid apple would be up in desile one all the way down to the bottom Okay, and then focus on those and those are the names that are really bad And then what we do is we break it up between five or six traders So every trader gets 40 or 50 names and we keep them out there for the entire week and I tell the traders Let's be opportunistic. So You know in the u.s. We have 16 different exchanges. We have 40 pools of liquidity So it's a little bit like whack-a-mole when you're trying to trade one of these names You don't know where the seller is at we have access to brokers who focus just on illiquid small cap names We have we'll we'll run these names through all sorts of dark pools at s's If a broker happens to be doing a small cap rebalance where maybe a Manager is getting out of some small cap names They might call and say hey We've we've got a lot of small caps on our pad today and see if we can get a match with those names And and for the entire five days we'll just focus on those And then the bigger names rick those are the names that we will if we have a trade list Cash coming into the fund around three o'clock is when we'll generate a trade list That's when we're buying the apples microsoft And those are the easy names to trade it it also Is very nice that the most liquid time of the day in the market is that last 45 minutes I think 25 of the total days volume is in that last 25 minutes So you're trading When the spreads are the narrowest and the top of book liquidity is that it's greatest So it is very easy to trade in that type of an environment But that's kind of how we get the exposure to the small cap is running that list And then being opportunistic if there are small caps available And those are names we'd be happy to get an execution at 10 30 11 in the morning It doesn't matter because they such tiny names in the index. It's not really going to impact at all Let me ask a question about new issues. IPO's a brand new company is coming to the market Now they don't go right into the index right away That's a little bit of time like you said Chris, you know adds them Periodically. Yeah. So on that rick, it's a if it's large enough Chris will add it in five days Five days for a large IPO and that's incredible because back in the day It sometimes would be three months six months And considering our size if you have the ability there is this massive liquidity event when an IPO happens and you probably saw it this week with Birkenstocks even though it wasn't added to any of the indexes because it doesn't have a us domicile Or it's not incorporated in the us. So i'm not sure where where it's going to end up But you have this massive volume rush and to be able to trade in that is really beneficial because you're not going to have Impact if you have size to do but if that name gets added to an index in six months When the volume has kind of dropped off you potentially could have a lot of impact So crisp adds within five days and then some of the other index providers you might have to wait until the next rebalance So now it might be december before an IPO would get added 2023 2022 relatively quiet times on syndicate and IPO back in 2022 We participated in over 400 syndicate offerings and added over 350 million dollars worth of value added to the portfolios by participating in syndicate and IPOs So i want to understand this When an IPO is coming out you get the roadshow and vanguard Can you buy on the IPO at the IPO price vanguard? But does it go into index funds? It doesn't go somewhere else Now good question. So if it's if it's a large IPO that it's getting added in five days We will potentially go in for a piece of it now in the fund itself in the fund itself Even before it's in the end it has not been added to the index yet now. We know it's going to be added in five days Now do we go in for the full amount? Absolutely not We might go in for a small portion of our order and take advantage of the IPO price now It's not an automatic. Hey, there's an IPO coming. You guys are going to go in on it We do analysis of it to see how many times oversubscribed it might be If it's an IPO that feels like it's going to be a little flat We're not going to have any part of it But if it's multiple times oversubscribed then we have the ability to go in the IPO We will go in for a portion of our order Knowing that the bulk of our order is going to be bought in five days time when it goes into the index But wasn't this active management? No We we see this as as as as a value add strategy as long as it's done in a risk-controlled manner But uh nice try rick Yeah Well, I was always wondering about big IPOs, you know, I know they're going to go into the index and I know that a lot of them pop You know, uh, as soon as they start trading on a secondary market and I was like, gee You know, are we uh able to participate in that through uh indexing even though they're not in the index And your answer is sometimes Yeah at the discretion of vanguard, right and it would be it would be I mean Sometimes I mean you could put in for a large order you might get a very tiny piece of what you're looking for But just because of it But yeah, you do have the ability to go in on them, especially if they're getting at it Now if an IPO is not getting at it for three or four months, that's a whole different story Well, let me ask a question about this then so you you're going to get a share of the IPO that you know Is probably going to pop on and you you like it It's oversubscribed by however many times it needs to be oversubscribed Yeah for you to for you to like it But you have all these different funds out there. Yeah, how do you decide? Who gets it? Yeah, so we we we prorate it basically Oh, you do do prorate it across all of the so for example if it's crisp and we know it's getting added in five days We're going to know based on the size of the company. Is it going to be small? Is it going to be mid? and based on that The good thing about total stock is almost involved in every one of them because it is it is the entire market But in terms of total stock If it's small cap small growth They all get a portion of it all gets on the size of the fund based on the size of the fund on the way to meet Yeah, all right. Well, all right, you know, you I know you use some derivatives During the day like at the end of the day you have a lot of cash You need to equitize that cash talk with us about how you might use the futures markets versus the cash markets to Square up your portfolio if you will by the end of the day So futures are incredibly helpful now I would say Ideally we hold more no more than maybe 30 35 basis points with the futures in in total stock market And the reason we use futures is multiple reasons number one When stocks go x dividend So say for example today is a monday and a stock goes x dividend tonight We need to spend that x dividend amount on the close and some days in total stock market That can be two 300 million dollars worth of names in the portfolio that are going x dividend We need to spend that The difference between x date and payable date can sometimes be two three weeks So it goes x today. We don't get paid for three weeks If we had no futures in the fund and we spent the x dividend It's no different than if you guys spent money you didn't have in your bank account You get hit with overdraft charges and when rates were zero overdraft charges were no big deal, right? But now the rates are five five and a half percent The banks are coming back and say hey you overdraft Here's what you owe us because you spent money that you didn't have in your account The beauty of the futures is that they kind of give you a cash Cushion in your fund That allows you to spend the dividends without overdrafting So that's one of the nice things about it. The other thing is that believe it or not We get calls at 358 to say You either have cash in or out of your portfolio It's physically not possible to generate a trade list and get it down to the floor in two minutes Who do the calls come from? within vanguard like We have a large transaction area. So any You know institution maybe that was bringing cash in It would get funneled through and then we would get notified Hey, you wouldn't get notified until two minutes before the market it has happened now Do we ask for that? No, we say hey listen, please let us know by three o'clock But it does happen if it's a large purchase into the portfolio We have the right to reject it if we don't think we can equitize it in time and get it in We have the right to say no. We cannot say no to a redemption Oh, so a redemption we have to honor So if we had a redemption in a fund One of the nice things about having futures in the fund that we can sell futures So I can sell the futures to fund that redemption that was called in late in the day Um, we also use futures If you're just trading and you have a rebalance where you have buys and cells and you're trying to stay market neutral If one side gets ahead of the other say your buys are very liquid your cells are not so liquid You can sell futures to keep yourself dollar neutral in terms of trading in the market So they are a very value, you know in terms of a great tool to have in terms of trading But we do, you know, it is a small portion of the overall holdings in the fund So it sounds like you've got a busy day. What I'd like you to do if you could for us is walk through a typical Day, um, you know, you get in in the morning or maybe you've thought about it on the way in What is your day look like from When you get in what time you get in all the way through until you leave at whatever time you leave Yeah, uh, so One of the ways that you have really tight tracking is to make sure that you're 100 invested at all times In addition to having the exact weights in your fund to the benchmark You need to make sure that your fund you're sitting on when you come in in the morning in an ideal situation Your fund says zero in terms of your liquidity. It never happens You all you're either sitting on 10 or 15 million or you're over invested So the first thing you do is Tie out all of the all of the activity that got processed overnight Does does it make sense that my fund is sitting where it should be in the morning? And I will sign off on that as the portfolio manager And then we have someone from our risk area that will sign off on that and then we have somebody On the desk that is a basically overseas Um a desk supervisor to make sure that all of the index changes all of the cash flows got So there's three sets of eyes that will sign off on my portfolios in the morning That's generally completed by about nine o'clock 9 15 Before I even get in there is a team from our data team that pulls in all the indexes from all the different index providers And they make sure that the indexes that i'm looking at on my screen when I log in Are exactly the same indexes that crisp is giving out that s and p is giving out so that we know that foundationally We're tracking the right benchmark and there are numerous corporate actions splits reverse splits All kinds of things that might be happening That those indexes need to account for and making sure that our indexes are good is really really important So when we tie out our everything by you know, nine o'clock 9 15 market opens And then we start thinking about what's happening today. And so we have Notifications that come out from crisp from s and p from futsy from russell saying hey here index changes that are happening on the Closed tonight And our goal then rick will be to make sure that we position those portfolios to make sure that at four o'clock Our funds are identical to the index any index changes that are happening any syndicate offerings that might have happened overnight We factor those in Any, you know dutch tenders any kind of corporate actions all of that Over the course of the day is you know, we'll have meetings about we do a We generally will have one person on the desk becomes kind of the quarterback for A particular index change so all of the information where brokers are calling us to say hey We know there's an increase in the shares tonight We have a seller of this name you funnel that all to whoever happens to be the trader that is responsible for that So that person kind of becomes the expert And you know before you know it you're it's 9 30 and all of a sudden it's it's 3 30 and we're getting ready to send trade lists down to the floor And in between we'll have meetings we have you know, i'm on a number of committees For example itaq committees with new york with nasdaq Market structure type issues that might be coming up over the course of a day so there's It's it's incredibly No day no two days are the same So even though you know, there might be things that you think you have to do when you come into work Like i mentioned yesterday with activision that was an expect that i think most people thought it was going to close next week But all of a sudden yesterday i come in and we have You know 20 of us huddled around the table at eight o'clock in the morning figure out How do we handle this index change tonight and what are the repercussions across all of portfolios? And before you know it you're getting ready to to trade at three o'clock Well, i'm gonna i have one more question But but before i do that if people in the audience have questions mel where's mel mel there's mel You could hand your question that you have just write it down on a piece of paper hand it to mel Because we do have 10 minutes for q and a at the end from the audience So there's mel you can get you can get up mel get up and walk around And hand him your question. Okay, so Here we go with the last question, you know indexing is a evil evil thing at least that's what the media says It's worse than marxism. I understand. Yeah, i mean You control the universe, right? I mean you're It could bring down the entire financial system. What do you say to these critics? Well, I I would say listen Think about all of the benefits That indexing has brought to investors. I think since 1993 Up through 2021. I think i've seen estimates mike shared with me 334 billion worth of savings to investors when you compare the expense ratios of index funds versus You know some of the more higher active funds so incredible benefits There are just so many advantages that I see with indexing in terms of the low cost the low turnover Helping people save. I mean I i've had so many good conversations probably with some of the people in this audience when bogelheads used to come When you would come to campus About people telling me hey, I I worked in this job for whatever number of years And I put money away and I've been in total stock. I've been an index 500 I've been in your total bond. I've been your total international And i'm going to be retiring at 52 years of age and I can't tell you how good that feels So it does irk me a little bit when I hear people bashing indexing because I look at all the benefits that it's brought and Listen, we have all the assets that you talked about rick, but it's at the end of the day It's this audience. It's your money that we are managing And we are incredibly privileged to be in a position to manage the money for investors like you And we have 50 million shareholders that we we take that incredibly seriously The argument, you know, I've heard that indexing it doesn't really contribute to price discovery so that You know potentially you would say well if if If there are disparities in price it should be a goldmine for active managers It should be so much easier for you to outperform And we haven't seen that it's incredibly difficult to outperform the markets It's a zero-sum game for every dollar that outperforms as a dollar underperforming And when your factor-end cost is just incredibly difficult to outperform And I think a lot of these articles that have come out bashing indexing. I think If if you dug a few layers You know if you peel the few layers I think you'd find that there are people probably not happy that they're losing money You look at the cash flows investors understand If we look at where the net cash flows have come it's To that high that lowest quartile of expenses 1.5 trillion has come in since the 90s Whereas if you look at the two three and four quartiles in terms of expenses That has been a net outflow of 1.6 trillion So investors understand that as as as mr. Bogle used to say, you know, you you get you keep what you don't you get what you don't pay for right so We're very proud of what we have we understand What a privileged position we have to manage for money for 50 million odd investors and Yeah, we think indexing has a long way to go yet rick So while mel is making his way up to the podium make your way up to the podium mel Got one last question Now you told me this in an interview that I did with you and the Bogle heads on a vesting podcast that It's a misnomer that index funds are doing a lot of trading In fact, you trade very little amount of the shares that are actually traded on a daily basis could just hit on that once Yeah, yeah, absolutely. So if you look just a normal day Probably index strategies account for less than five percent of the trading that's out there Even yesterday, you know when I mentioned Activision and let's say You know total stock wasn't the only fund that was trading but maybe in total our desk might have traded around three billion yesterday That sounds like a ton of money and it it is But if you the entire over the entire stock market if you look at what traded yesterday For stocks and for ETFs, it's probably in the six to seven hundred billion So that three billion is is less than half a bit, you know, it's less than half a percent of the average volume So one of the really good things about indexing rick and we talked about it on your podcast was The low turnover so even total stock, which is as you mentioned the largest fund When I have rebalances, they're small So the total turnover is less than 10 percent So turnover is you know, the average assets if you look at you know The lesser of buys and sells divided by the average assets in the fund It tends to be below 10 a year active managers You can have turnover 70 80 percent and believe me, that's not a tailwind when you're turning over a portfolio like that you're incurring transaction costs commissions taxes and we just you know, we really don't trade unless we have to trade and so One of the beauties of indexing is the fact rick that you do have such low turnover incredibly tax efficient And you know, it's it's it's a tough benchmark to outperform I got a lot of questions in a lot of different areas. I will say that I'm just going to ask jerry what The questions that actually pertain to to him, you know questions like You know, will this be available by vanguard or is vanguard to go to start offering this fund or that fund? I really he wouldn't know honestly, and I'm not going to I'm not going to do that So I'm kind of try to stick with you know, his His area Here so first of all Uh Do you also on your desk do international stocks? So the way our desk we have about 25 people on the desk and it's roughly 13 on the domestic side and 12 on the international So we kind of have dollar Which is the side that I'm on and then we have non-dollar which you know people like mike parry and Jeff miller and christine frank one are the people who would Focus on the international side of things and that side of the desk Does a ton of work with our trading desks in London and also in australia. So if they have european names that they're trading They're sending those to the london desk and trading And we have about 12 traders in london similar amount of traders in melbourne and the melbourne traders Those guys would trade all of the asia pack names for trading. So over the course We have this concept of kind of past the book So we'll generate a trade list in melbourne Send it out to our melbourne desk. They will trade the asia pack names when they're done trading that They will pass it on to the european desk in the uk Europe is done. They will send it back to us And the international side of the desk them will trade canada latam those types names in a global portfolio So we do have an international side. I just don't happen to be on that side. I'm on the domestic side. Yep and On the international side, do they go through the same process that you go through on the u.s Side as far as you know when they're trading and so forth. Yeah, I mean they would interact There's probably more trading done on the domestic side because on the international side the generating trade lists But then they're sending the trade lists to the desk to the local coverage in london for european names And for asia pack But the concepts would be the same the risk metrics all that kind of stuff would be very very similar Yeah, so this I know is not in your area, but i'm going to ask it. It has to do it has to do with uh um voting proxies and A vanguard black rock state street all being you know the big three Yeah, um, do you when you're out there trading stocks? Do you run into black rock trying to do the same thing and state street trying to do the same thing? I mean There's three big index providers out there and you're all trying to jockey for the same stocks at the same time Do you see those trades out there and how does that affect your trading? Well, you know if you think uh, so i'll give you an example rick. So we mentioned activision last night, right? So it got deleted um s and p announced um That they are going to replace activision in the 500 next tuesday By lulu lemon So there's going to be lots of lulu lemon that needs to be bought and we know that it's probably net If you factor in all the folks that you mentioned vanguard black rock state street everyone else that manages 500 There's probably 18 million odd shares of lulu lemon That will need to be bought now Brokers make a living out of predicting which names they think is going to be added to the index So lulu lemon has been on the list for probably a year now We know that in total we know how much that needs to be bought And we will put together a strategy on monday morning about Of the total that needs to be bought. We know what we represent and we can look at the volume numbers and start to see like Okay, it looks like there's people that are starting to front run The order in it, you know, try and get ahead of the indexing demand for tuesday And some of those may be competitors some of those might be hedge funds And all of that kind of gets built into the strategy in terms of how are we going to buy lulu lemon for our 500 portfolios But yeah, you're fully aware of it's all out there in terms of the holdings and the assets So we know as the as they know what we have to buy And then it just comes down to the desk itself in terms of the traders the experience the strategies And we feel really good about the position that we're in You know, I've been on the desk. I've been a vanger 31 on the desk about 28 Don butler is about the same. We have probably we we understand the different strategies involved And it's our goal to make sure that you know when when a name like lulu lemon gets added That we do it in a way that that we feel we can Potentially add a little bit of value add to the portfolios But making sure above all that we track the benchmark closely And on that point I've noticed that you're actually able to make up some of the basis points Yeah, in other words, if the etf is three basis points, you actually outperform Yeah, so this year year to date. I think we're more active management by the way Go ahead I think so if if you think about it We would call it value add right So if if you think about it so the expense ratio on vti is three basis points The value add year to date is about three and a half Yeah, and so it's a combination of some of the things we talked about some of it a syndicate Some of it is complex corporate actions For example, there was one large one a few weeks ago. Johnson and johnson spun off cave view We were able to handle that action in such a way That we added 190 million dollars in term to the funds in terms of how we handled the spin-off How we elected shares and how we traded around it That moved the dial a little on some port, you know, not quite a basis point in total stock But but somewhere between 0.6 0.7 of a basis point. So Those types of strategies Also our sec lending our sec lending is that the security is lending So you think about a broker wants to short a stock they need to get a locate They'll come to a company like vanguard and say, hey, can we borrow x number shares? And they will give us collateral We then can invest that collateral and sometimes it's incredibly lucrative. So You're probably familiar with amc movie theaters You know, they had a complex corporate action going on this year that everyone was looking to borrow amc to the tune of like It added some massive amounts of money to our shareholders now We're a little different. I think in that our Securities lending it cost a certain amount of dollars for that group to run But all of the money that comes in through Sec lending take out whatever takes to run that group the rest of that money goes directly to the funds that loaned it out there's no Company, you know our management company keeping a portion of that to make sure their stock price remains at a certain level It goes directly back to the shareholders. So you have a situation where in total stock Close to two basis points this year has come from security. It's not, you know, sec lending extended market. It's 15 basis points has come from sec lending a lot of it is related to that amc because it was so lucrative um But that group this year has brought in over a billion dollars to vanguard in terms of loaning out securities And that money has gone back to help offset the expense ratio 100 less the cost of the less the cost Which is different than other index fund providers where they keep 50 percent of it Give us give only give the shareholders 50 percent. So yes And so in the end I made this comment yesterday and another I said beta is free Beta is free and you're confirming that. Yeah, I mean if you if you own vti this year in fact, you're getting a free lunch Free lunch. Yeah. Well, thank you I think that's all the time we have Uh, um, thank you jerry. It's been really fascinating. I really appreciate that. Thank you for coming in today Thank you, any time