A conversation with Vanguard’s U.S. capital markets chief

Coleman: We try to ensure that investors have the best possible experience and the lowest trading costs when buying and selling Vanguard ETFs. A big part of our job is maintaining solid relationships with key market participants, such as authorized participants, market makers, and exchanges.¹ We monitor trades in our products and seek to ensure tight bid-ask spreads and appropriate premiums or discounts. We also serve as product advocates, collaborating with product managers, our legal team, and portfolio managers to enhance our product offerings. Investor education—about the ETF marketplace and trading best practices—is the final part of our mandate.

Coleman: For equity funds, the ideal scenario is a premium or discount close to zero. However, fixed income ETFs are expected to trade at a slight premium due to the pricing mechanisms used, which are based on the bid price of bonds at the end of the day. This differs from equities, which use the closing price. Understanding these nuances is crucial for managing how ETFs trade in relation to their net asset values. 

Coleman: Best execution is fundamental to our operations, starting with education and consulting with clients. We regularly publish thought leadership content aimed at explaining best trading practices and the total cost of owning an ETF, which includes not just the expense ratio but also spreads, premiums, discounts, and market impact. We closely monitor market makers and ensure our ETFs are listed on multiple exchanges such as the New York Stock Exchange, Nasdaq, and Cboe to foster competition and encourage innovation. This helps maintain excellent trading conditions across our products. 

Coleman: Market makers play a crucial role in ensuring liquidity and maintaining tight spreads. Vanguard selects lead market makers who meet specific standards and obligations set by the exchanges. We monitor their performance continuously, and if we observe any decline in their performance, we talk with the market maker to address those issues. When necessary, we don’t hesitate to switch to a different market maker to uphold the quality of our trading execution. 

Coleman: We’re regularly engaging with a diverse group of ETF investors. Given the ETF structure, there are benefits to having long-term, buy-and-hold clients as well as larger institutional clients with shorter holding periods, because they help lower the total cost of investing for all our ETF clients. For similar reasons, we’re also doing what we can to ensure that traders have access to robust sets of options on our ETFs. 

Coleman: Technology is integral to our strategy for improving ETF trading. We developed an authorized-participant portal that revolutionized how transactions are conducted, setting a standard in the industry. We’re also investing in automation, particularly for fixed income ETFs, to make the trading process more efficient and reduce turnaround times. Our in-house technologies, like Spread Analytics, allow us to monitor market data in real time, providing insights into how well our ETFs are trading relative to their baskets of underlying securities. 

Coleman: The increasing role of active management within ETFs is a big one. Active ETFs make up a small portion of the industry’s total assets under management—6% as of December 31, 2023—but they’re capturing a significant share of net cash flows—21% in 2023.² The adoption of active management strategies in ETFs is growing as asset managers become more comfortable with the ETF structure. Additionally, we’re attentive to the potential implications of blockchain technology and tokenization in the financial industry, which could revolutionize how investments are managed and traded.

Note: This interview was edited for length and clarity.

• Exchanges play a vital role in driving ETF liquidity (article, issued May 2024)
• The five factors that make up total ETF costs (article, issued March 2024)
• ETF premiums and discounts, explained (article, issued August 2023)