Vanguard may solve an indexing problem it helped create

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The ease and frugality of investing in the stock market through index funds has made indexing so popular that no less an authority than John Bogle, the chairman of Vanguard and the instigator of the trend more than 40 years ago, felt compelled to issue a warning: Indexing conceivably could become so ubiquitous, albeit well into the future, that the stock market essentially ceases to function.

The filings are somewhat vague, but it appears that Vanguard is planning to sell actively managed exchange-traded funds. Todd Rosenbluth, director of ETF and mutual fund research at CFRA, a service that rates funds, said in a recent note about the filings that the new funds could be ETF clones of existing mutual funds, such as Vanguard Strategic Equity Income VSEQX, -0.32% or Vanguard Global Minimum Volatility Fund VMVFX, -0.08%

Strategic Equity Income owns a mix of small- and medium-sized companies. Global Minimum Volatility holds stocks that feature characteristics likely to limit swings in prices. Both are managed through so-called quant, or black box, techniques. The managers fill the portfolio strictly through a rules-based, computer-driven process, exercising little or no discretion apart from crafting the stock-picking model.

The mutual funds are dirt cheap to run, with total annual expenses of 0.25% of assets or less, according to investment researcher Morningstar. The electricity that keeps the black box humming doesn’t put much of a dent in shareholders’ wallets, apparently, and whatever costs the funds incur are spread over multibillion-dollar asset bases.

The quant model, with its simplicity and rigor, makes the two Vanguard portfolios ideal for cloning into ETFs, and ETF versions should be even less expensive to run than the mutual funds.

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