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Don't Blame ETFs for Market Volatility: Vanguard CIO


The chief investment officer of Vanguard defended exchange-traded funds , telling CNBC Monday they are a low-cost way to broadly diversify and are not the cause of stock market volatility.

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"I don’t believe concerns [ETFs] are creating distortions in the market are correct," said Gus Sauter, whose company had $171 billion in ETF assets compared with $1.49 trillion in mutual fund assets in 2011. He blamed "macroeconomic" events, which he didn't specify, for the volatility.

ETFs are a big part of Vanguard's life, of course. It led the industry in inflows last year for the second straight year as the overall ETF market has grown, from $33.9 billion in assets in 2000 to an over $1 trillion market today.

Sauter said Vanguard's ETF investors are going into "broad building block" funds that are focused on stocks, companies that pay dividends and even emerging-market funds.

People are investing in China, for instance, because of expected low economic growth in the U.S., he said.

Investing in ETFs

"They look abroad and think, well, China's growing its economy 9 or 10 percent and they think 'I've got to participate' with that growth," he said. "They somewhat mistakenly think strong economic growth means strong investment growth but we've found is there is no correlation between economic growth and investment returns."

Investors are also big on Vanguard's diversified U.S. bond ETF, and Sauter called that a prudent strategy if investing for the long term.

"Bonds play a role in our portfolio because of risk reduction," he said. "We don’t invest in bonds because we think they’re going to be the big workhorse and provide us with great returns. But  they still should be in a portfolio to moderate the volatility in your portfolio that stocks bring."

Update: An earlier version of this report incorrectly relied on Morningstar data supplied to CNBC that did not reflect total ETF and mutual fund assets.