The Vanguard Group, the manager of the world's largest U.S. stock fund, has a message for investors unsettled by the recent market volatility: Expect more of it.
Gerry O'Reilly, the Vanguard portfolio manager who runs its Total Stock Market Index Fund (VTSMX) — which isn't only the largest U.S. equity fund but the largest equity fund in the world — told CNBC's Bob Pisani on Tuesday that Vanguard expects the volatility to continue for the rest of the year.
His Vanguard fund — which includes multiple share classes and an ETF, the Vanguard Total Stock Market ETF (VTI) — has $700 billion in assets across the entire universe of 3,600 U.S. stocks, from Apple all the way down to No. 3,600.
What is O'Reilly doing amid the volatility? Buying more of those stocks.
When the Dow dropped by more than 800 points on Oct. 10 and the S&P 500 was down 3 percent, the Vanguard index fund giant was a net buyer, O'Reilly said. As a passive fund manager, he isn't making a call on the market or stock value. The buying by O'Reilly's giant fund reflects the fact that even amid the big Dow plunges and recent evidence that buying on the dip isn't working — long-term-oriented Vanguard shareholders continue to look for opportunities to put more money into stocks. Days when the stock market is beaten up are among those opportunities.
"Shareholders direct whether I trade or not; it is cash flows and institutions sending in money on those days triggering us to trade," O'Reilly said.
In October, Vanguard took in a net positive $18 billion in flows into its equity funds, he said. "The net cash flows are triggering us," he said.
Vanguard saw "slight" outflows in bonds in October.
Vanguard Group CEO Tim Buckley said in an interview on CNBC later on Tuesday that the return of volatility is normal, and has led to a shift among investors who are no longer "just piling into equities" and being more balanced in flows, "taking a bit of risk off the table."
ETF flows are down from the record levels set in recent years — down about 55 percent for the industry and 40 percent at Vanguard — but they are still healthy. The ETF industry has seen inflows of roughly $241 billion so far in 2018, with $162 billion into stock ETFs, according to XTF.com.
In November, the ETF version of O'Reilly's total stock market fund, VTI, has taken in close to $1 billion, and more than $1.5 billion in the volatile fourth quarter.
All the big equity ETFs have seen continued inflows even as volatility has picked up, with the iShares Core S&P 500 (IVV) and Vanguard S&P 500 (VOO) leading the way, with flows of $1.9 billion and $1.2 billion, respectively, through Nov. 27, according to XTF.com data. Though the iShares Core Emerging Markets ETF (IEMG) has been No. 1 in November flows, at over $2 billion, as many investors sour on the U.S. stock market and look for beaten-up overseas equities to buy at better values.
As market volatility picked up in the fourth quarter, some fingers have pointed to passive investing as a contributing force. O'Reilly dismissed the theory, which isn't new and has been previously debunked by Vanguard Group founder Jack Bogle. The Total Stock Market Index Fund manager didn't rule out that index funds and ETFs could in theory contribute to market gyrations, but said that in reality the current breakdown of passive versus active assets in the market doesn't support these fears. "Passive investing is 20 percent of total shares outstanding in the U.S. There is still 80 percent active … and still a long way to go before it becomes an issue," he said.
This story has been updated to include comments from Vanguard CEO Tim Buckley.