Episode Transcript
Lakshmi: Hello and welcome to Indexed to FTSE Russell. My name is Lakshmi Thurai, I'm a regional director with FTSE Russell's buy side team in the Americas. And joining me today is Fernando Morett senior product manager in the Americas with Vanguard. Welcome.
Fernando: Thank you for having me. Great to be here.
Lakshmi: Fernando, I'm really excited about our conversation we're having today. Today we're going to be focussed. So the audience is aware of U.S. equity ETFs based on the Russell Index. These can really help investors build diversified exposure and positions, especially across size, style and market cycles. So from an investor's perspective, especially when it comes to Latin America, it is very important to look beyond the ETF label and really understand the underlying index because these have ultimately determine the exposure and investment outcomes. So the Russell US indexes are widely used benchmarks globally. And the Vanguard and Russell FTSE Russell, we have partnered together to create UCITS ETFs that are commonly used across Latin America, and they are designed to provide a clear representation of the US equity market. So, Fernando, please share with our audience why investors should really care about indexes underneath the ETF.
Fernando: Thank you. Good question. So look when investors decide to invest in an ETF, especially if it's an index ETF. They should understand that the index or benchmark defines investment exposure. It defines the stocks that you own, the weights of each of these stocks and ultimately the investment outcome. There are different methodologies, inclusion rules, rebalancing frequencies and all of these lead to a different investment outcome.
Lakshmi: What matters most when selecting an index to be used in an ETF?
Fernando: Yeah, that's a great question. So when selecting an index for an ETF, there are several considerations that really matter for us at Vanguard. I'll name a few, but they're the most important ones. So the first one would be representation of the market. So the index needs to accurately reflect the segment that the investors are trying to access. Second one would be transparency. A well-designed index follows a clear and objective methodology, such as a given the ability to investors to understand how securities are being selected, weighted and rebalanced. The third would be investability. The strategy must be practical to implement, with sufficient liquidity and reasonable turnover to support efficient portfolio management, and therefore it would be the index provider, right? Vanguard focuses on independent providers with strong data quality and risk controls to ensure reliable and accurate index data.
Lakshmi: That's really great because FTSE Russell really reflects that. When we're thinking about our index methodology like maintaining the index and longer term the governance and oversight of our indexes. The US is one of the largest economies in the Russell US index framework, allows investors to access broad US exposure, or they could target specific segments of the market. So how does Vanguard think about that in terms of its offering exposures through ETFs, particularly its role as a long term or targeted allocation?
Fernando: Yeah. Great question. So we tend to think about this through what we call a toolkit approach. The idea is that investors have access to a range of building blocks, and then they can decide how to combine them based on the outcomes they're trying to achieve. We typically encourage starting with a broad, diversified core using low cost US equity exposure as the foundation of the portfolio. From there, if it is needed, the Russell framework would allow investors to add more precision, whether that is across market cap or style segments like growth or value that would enable more targeted allocations, helping investors fine tune their portfolios in a way that aligns with long term goals. But what makes Russell Frameworks particularly effective here is that all of this happens within a consistent rule based system, which helps investors understand how each piece fits together.
Lakshmi: So the Russell indexes are modular. So basically they can be broken down into segments. Would you say that the modular nature of the Russell Index makes a particular effective portfolio construction, and how should investors think about that flexibility it gives?
Fernando: No, absolutely. We believe the modular nature of the Russell Indices is actually one of the biggest trends for portfolio construction. So at a high level, the framework is designed as a set of building blocks. You can start with broad US equity exposure and then move consistently into more specific segments like mid-caps, small-caps, and even growth and value. But what really matters is this consistency behind the design. All of these segments are built using the same rules and definitions. So investors are not combining different approaches. They're working within one same coherent framework. And that allows for a more delivered portfolio construction.
Lakshmi: So part of being modular is also thinking about the styles. And for investors who want to position their portfolios in an ever changing marketplace, how should they think about focusing in on growth or values in terms of Russell ETFs to help express those views?
Fernando: Yeah. When thinking about growth and value exposures using in this case, Russell Indices is really about bringing a bit more control into the portfolio. I would say the starting point is the methodology. And Russell uses a transparent rule-based framework to define growth and value. So investors have a clear and consistent understanding of what they own. Growth and value, as we know, tend to perform differently across market environments. So investors can tilt toward value if they want a more valuation sensitive exposure or to get growth if they are looking for companies with a stronger earnings potential, for example. Over time, we know that market performance can shift a portfolio style exposure unintentionally. For example, strong growth performance can increase the allocation beyond what was originally intended, and using Russell style ETFs would allow investors to rebalance back to their target mix in a disciplined and transparent way. But overall, Russell growth and value exposures provide a structured way to express views and manage styles over time, helping portfolios stay aligned with long-term goals.
Lakshmi: What about when investors want to think about market cap? How should they think about the Russell 2000 and its ability to diversify their portfolio?
Fernando: Small-caps play a distinct role when it comes to diversifying US equity portfolios. Many portfolios today are naturally tilted toward large-cap stocks, often driven by market cap weighted exposures and the strong performance, for example, of Mega-caps. Adding a Russell 2000 exposure, for example, will help broaden that diversification not just by increasing the number of holdings but by introducing companies with a completely different business model and even a return driver that will help balance concentration risk. And as we know, small caps can complement large cap exposure and reduce reliance on a relatively small number of dominant names, leading to a more even distribution across the market. And importantly, they add cycle diversification, right? So small-caps tend to perform differently across different environments. So combining them can help build a more resilient long-term portfolio. But the key message here is that small caps are not about replacing large caps. It's about complementing them, helping investors build a more balanced portfolio across the full US equity opportunity set.
Lakshmi: Looking ahead, where do you see the greatest opportunity for investors using Vanguard's Russell ETFs long term core holdings with tactical allocations or diversification?
Fernando: The biggest opportunity continues to be using broad US equity ETFs as long term core holdings. Offering simple, low cost and diversified exposures. But at the same time, we know that investors are becoming more and more intentional in how they incorporate targeted exposures across size and style to refine their portfolios. So the Russell framework supports these well through its model design, enabling investors to add small or mid-caps to diversify away or beyond large-cap concentration, or adjusting growth and value exposures to maintain some balance within a single consistent system.
Lakshmi: Fernando, I really enjoyed our conversation today. Thank you for joining us.
Fernando: I also enjoyed the conversation. Thank you so much.
Lakshmi: And to the audience, thank you for joining us and we look forward to seeing you at the next indexed to FTSE Russell.
