IF.com: Are you going to try to match Barclay's lost cost figures for exchange-traded funds (ETFs)?

GUS: We have not actually priced our exchange-traded shares at this point. We're still a couple of months away from introducing them. We haven't finalized the numbers. We did recently announce an Admiral Class of shares, which will be a second class of shares for higher-worth individuals and loyal clients that will be in the 500 Portfolio at about the 12 basis-point range. We don't make money on this because we operate on a net-cost basis. We're unique in the mutual fund industry in that the people who invest in our funds actually own us. So what we would make as profit we turn back over them in the form of lower expense ratios. We merely operate at cost. Whatever it costs us to operate the funds, including our salaries and everything else, we only charge that amount to the funds themselves - so Vanguard essentially breaks even every year.

Vanguard is actually owned by its mutual funds. So the investors in those mutual funds are making what would be our profit.

IF.com: With the lower rates and increased competition in the indexing world, is there a trend toward short-term investing today?

GUS: It's difficult to detect what is going on in the exchanged-traded shares world because some of the activity is done by broker-dealers, so it's hard to figure out what the retail investors are doing. But there's a lot of other evidence that over the years investors have been moving their money quickly. We look at turnover rates in the industry, which have gone up about fourfold in the last 25 years. They have gone from 10 percent a year to 40 percent a year. So the average holding period has gone from about 10 years to about 2 and one-half years. It worries us. We do not think this is an appropriate way to try to save for goals. We think that longer time-horizon investing is the best way-certainly to achieve retirement goals. If you're forty years old, I'd say longer term would be 30 or 40 years horizon. Even if you're 60 years old, I'd say it's 20 years. It's certainly not 2 and one-half years.

IF.com: Is it true that there have been times when index funds have not performed so well?

GUS: If you compare them against the appropriate type of managers, index funds do quite well during all periods. It is not appropriate to compare the S&P 500 against all managers because there are a lot of small cap managers who, when small caps are outperforming, beat the S&P 500. And when small caps are underperforming, they underperform it. You have to factor that out. You have to compare apples to apples, and oranges to oranges. When you do that comparison, you find that indexing works really quite well over most periods, certainly over a longer time frame. There can be an individual year when an anomaly crops up - but go back the last 25, even 50 years, and you'll find indexes performed quite well.

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