All right, before we get started with the first event, I'd like to introduce somebody in the audience, and that is Mike Nolan. Mike was Jack's assistant. A lot of you know Mike. Mike was Jack's assistant, helped write how many books? At least four books, four or five books, and is still at Vanguard and is my number one go-to guy for anything I need from Vanguard, including people to interview, which brings us to our guest today.

I have a question, though, in the room. How many people here own a Vanguard index fund? Okay. The fellow today who I'm going to speak with is your fund manager. So if you have any complaints -- Anyway, I am pleased, we are so pleased to have Jerry O'Reilly as our speaker today.

He is a principal and portfolio manager at Vanguard, and he oversees the $1.4 trillion Vanguard total stock market index fund, which is the largest mutual fund in the world, and he also oversees 16 other funds of which I believe you said five of them have your name on it.

So in total, I believe, about $4 trillion. Is that a rough estimate? Yeah. Which is 10% of the value of the entire stock market. Guy's important, right? So with no further ado, let me introduce Jerry O'Reilly. Please come up to the stage. >> That's yours. This is mine. >> Okay, good.

Good to go. Well, again, thank you for being here. And my numbers were pretty correct, right? $4 trillion? >> Your numbers are good, yeah. >> I do, yeah. I do. You know, a lot of it is because I'm exhausted when I get home, so there's no problem there. But, yeah, I mean, listen, I am the name person on there, and I am surrounded with a phenomenal team that I work with.

And so, you know, we have 25 people, Rick, that manage that $4 trillion and change with, you know, average tenure I'd say about 12, 13 years, which is unusual in terms of, you know, the tenure. But, like, when we hire people, it's all about, you know, how are they going to work in that team environment?

How are they going to work in terms of collaboration? I know that if I'm jammed on something, there's like three, four people I can go to to have them pick up the lead. So we pride ourselves kind of in the team concept. But it is great. I mean, you know, I started off entry level on the phones at Vanguard.

And, you know, my first paycheck, I remember, coming home, and I said to my wife, "Yep." I said, "We're starting." And she was working in a shoe store. And I think, you know, I remember thinking, "Well, it's a start." I got my foot in the door. And within three years, I was on the desk.

And I felt like this is what my passion -- this is where my passion lies. >> Now, you have an interesting background. So I'm going to go back even before then. And you were born and raised in Ireland. >> Partly correct. I was -- I grew up in Ireland.

But my mom and dad -- so my dad was one of 17 kids. >> Seventeen? >> Seventeen. One-seven. No twins. Grew up -- I have an aunt who's five years older than me, my Aunt Mary. And if you asked me to list all 17, I'd be stretched. I'd be here for a while.

But dad was -- grew up on a farm in Cowles County Mead, outside Cowles County Mead. Probably some of you have heard of the Book of Cowles. So that's where, you know, Cowles is. And dad, when he was in his early 20s, someone locally had gone to Canada to work in a town called Uranium City.

Which, if you look at a globe, where Saskatchewan turns from green to white, Uranium City is well up into the white. So dad and four or five local 20-year-olds went over there. And that's where he made his money. And my mom, he came back and they got married. And I was born in Uranium City, Canada.

>> Oh, isn't that right? >> And when I was two years old, they brought me back to Ireland. And mom is from outside Cowles, too. And yeah, grew up in Ireland. And then, you know, things -- >> Well, okay. So you were a track star. And you were recruited to go to college here in the United States.

>> Yep. >> And then you were actually an Olympic athlete. >> I was, yes. >> Tell us about that. >> So it was a few pounds ago, Rick. I used to be 152. But that's what happens when you run, you know, 90, 100 miles a week training. But yeah, I mean, I -- from 1976 was a pivotal year for me.

I was 12 years old. So you guys are all doing the math now. You're like, hmm, okay, I see what age he is. I was watching the Montreal Olympics. And there was a guy from Ireland who was like our LeBron James. His name was Eamon Coughlin. He was a runner.

He was at Villanova. And he was favorite to win the 1500 meters. And I had started running at that point. And I was fairly good. And I remember watching a documentary on Eamon and seeing like, hey, he's going to school. He's representing Ireland. And he was a favorite. As it turns out, he finished fourth.

And it was a great disappointment. But I remember he just planted a seed with me thinking, man, if I was good enough as a runner, I could actually get a scholarship. I could, you know, potentially set me off for a career. And I would go -- you know, we lived out in the country back home.

And I would come home from school, drop the bag off when the family was having dinner. And I'd go out and run seven, eight miles by myself on country roads. And at the back of my head was this -- fueling me was this potential that someday maybe I'll have an opportunity to get a scholarship.

And when I was a senior in high school, I won the Irish National Championships. And all of a sudden, I had 12 scholarship offers. And my mom, being Catholic from Ireland, she's like, Villanova's a Catholic school. That's where you're going. And so that was the end of it. And so I ended up in the fall of '83, showing up at Villanova campus, yeah.

>> Well, I just have to -- I just have to -- because you did walk into the stadium at Seoul, Korea. And, you know, all those people in the opening ceremony. I mean, just tell us just a little bit about that experience. >> Yeah. I was fine until someone yelled from the stands that there's 200 million people watching you.

The thing about the Seoul Olympics, and you can Google this, they brought all the teams in. And I was -- there was maybe 100 people on the Irish team between, you know, all the different sports, officials, and everything else. Phenomenal. The whole day just was incredible. They bring you into the stadium, and you line up on the infield.

And, of course, it's time to light the torch. The cauldron. And what they did was they released a couple of hundred doves as a sign of peace. And where do you think the doves landed? On the cauldron. And then two athletes went up and lit the cauldron. And that's the last time the Olympic Games have let off live birds.

It's not a pretty sight. I showed it to my kids on my daughter's jaw like she was 10 at the time, and her face just dropped. She's like, the birds. But, yeah, you can Google that. But phenomenal experience. Just as a 24-year-old, oh, incredible to be there. And then how did you get a job at Vanguard?

So there was a guy who Mike knows well who used to compete against me named Jim Norris. And Jim ended up being-- he was an assistant to Mr. Bogle for a number of years. He would have been involved in some of the earlier books, whereas Mike was involved in some of the later books.

Jim and I would meet at-- would race each other. He went to St. Joe's. I went to Villanova. They're literally four miles apart. And I got to a point in my career where I was making some money from running Rick, but not enough to walk in and potentially buy a house or even buy a car.

And I remember thinking, I need to find something a little more stable. And Vanguard was half an hour away, and Jim was working there already. And he said, listen, I'll drop off your resume. And that's how he got my foot in the door, as I said, as an entry-level person on the phones.

And within like a month or two, I knew that I was going to be here for a while. And it's interesting. You've been there for 31 years now? 31 years in March, yeah. And that's a real testament to me to Vanguard, because they hold their employees for so long.

Yeah, I mean, I think when we hire-- I mean, when I interview people, I'm not interviewing somebody that I want to be on the desk for two or three years. I'm hiring somebody that I can see 20 years, 25 years down the road. And I think Vanguard does a really good job of making sure that just the whole quality of just your work-life balance is good.

I mean, I have four kids, and they're all in their 20s now. But when they were 8, 10, if there was a dance recital, a ball game, it was no problem for me to run out and catch that, and you feel kind of like-- and then when you work with people like Mike Buick, Gus Sauter, and you learn from people like that, and you just-- Gus was probably one of those guys, the most humble person.

And I know he's spoken to the Bogleheads on a number of occasions. But it's just contagious. I would have ran through a wall for Gus, that type of person. And it just-- I mean, I just absolutely-- I tell people, interns who come by the desk looking for a little-- I say, listen, I'm 31 years at Vanguard.

On a Sunday night, when I hear the 60 minutes clock, I'm like, OK, works tomorrow. Awesome. I'm looking at the futures. I'm figuring out what we're going to be doing tomorrow. And it just, to me, it doesn't feel like a job. Well, let's go ahead and get into the portfolio management.

Let's first talk about the Vanguard Total Stock Market Index Fund, $1.4 trillion, roughly? Yeah, a tad under, yeah. And that includes both all share classes. All share classes, yeah. Just for clarification, Vanguard has a little different approach to ETFs versus mutual funds, where it's all the same pool of money.

Yes. Could you talk about that and how it's split up, then, at a different level? It is, yeah. So in total stock market, we have the VTI share class. We have admiral share class. We have institutional share class. To me, it's all just one large pool of money, which makes it easier to manage.

And there's also benefits to that multi-share class. So for example, whenever there's corporate actions going on where you potentially have adds to the index, if it's a standalone, I would need to sell, basically, to raise money to buy the stock that's getting added to the index. But in total stock market, on any given day, I could have $500 million coming in in cash flows.

I could have corporate actions. For example, yesterday, I came in in the morning thinking it was going to be a nice, quiet day. And all of a sudden, Activision is halted. And I have to spend $2.2 billion at the end of the day because I get $95 a share times all the shares of Activision I have.

And now I'm talking to NASDAQ about potentially, is it going to be halted all day? Is it just for the morning? And what's the repercussions of that for all of the funds that we manage? And for my funds, I needed to spend that cash and spread that across the rest of the 4,000 on securities in the index.

The share class also, when we have redeemed-- so if somebody does a create-- I'm talking about APs who are dealing in $20, $50, $100 million. Authorized participants are the people who create and redeem the ETF shares. Yeah, when they redeem, we're able to give them the lower cost basis stocks.

So take a stock, for example, like NVIDIA, which is up close to 200% for the year. We can give them the NVIDIA shares that we have at low cost basis, which tends to make the fund more tax efficient overall. So I want to just dig into that a little bit.

Because you do have this-- I call it a double-edged sword on tax efficiency of a fund like the Vanguard Total Stock Market Fund. If you have a stock that went down in value, so the basis is higher, and you're actually losing money, you would redeem that for cash and take the loss in the fund?

You potentially have the option-- so you can basically determine, when you're talking to our fund accounting, which shares do we want to hand out? So potentially, you could do that. The primary goal, Rick, is to make sure that we're tracking the benchmark. But there are different tools available. One would be the in-kind process.

The other would be potentially tax harvests at certain times of the year. So names like, for example, that we might have a cost basis of here that are down here, if you sell those names, as long as you don't buy them back within 30 days because of the wash sale rule, you're able to realize a loss.

So we do look to try and keep about 170 to 200 basis points of a cushion of realized losses in the fund so that we're not distributing gains to the shareholders. I think one of the big concerns is, when you look at the data on Vanguard Total Stock Market, it says unrealized gains.

And it would look like there's a huge, huge amount. And sometimes the media gets a hold of this. And they say, oh, if people started selling this fund, you're going to get hit with big capital gain distributions. But it's not really true, is it? No, I mean, it is something that we monitor literally on a weekly basis in terms of the capital gains.

And if we start to see that realized losses are getting below that kind of 170 basis points, we start to take action on it. And sometimes it's like we have, as you mentioned, the CRISP indexes. They do rebalances once a quarter. So if you think about it, we just had one in September.

If we sell names in the third Friday in September or during the five-day period, if they're not large names in the fund and they're stocks that we have a significant loss in the name, we can just put those names on hold for a period of 30 days. Now, these might be stocks that have a weight in the index of less than a basis point.

But they could be very tax-efficient when it comes to realizing losses. So we have a whole team that kind of works with us in terms of helping us identify what those names are and making sure that you don't have any concentration in any industries or sectors, or if that sector rebounded over the 30 days, you would be hurt.

So making sure we do it in a diversified manner. So on the mutual fund side, you're able to take losses and build up these capital losses because you're going to do it in cash. You're going to sell in cash. But on the ETF side, if you have a big gain and you want to push that gain out of the fund without the shareholders incurring a capital gain, you'll go through authorized participants.

So explain that process. I mean, how does that work, where you are able to push the stock out and the fund itself not actually take the gain? Yeah, I mean, it's, I think, all ETF providers, because of the in-kind mechanism, where if you have a stock, for example, that has a significant gain, if an AP comes in and does a create, and on the way out, they receive that stock, because it's done in-kind, the NAV of the fund really has the gain in it.

And it's not realized until a shareholder sells, whether that's in six months. So it's just deferring the gain is really what it's doing through the ETF mechanism. So the create, then, is this basket of stocks that comes in from the authorized participant, which is maybe a JP Morgan, or Goldman Sachs, or somebody.

This whole basket of stocks comes in. And that comes into the fund. You're not buying this. This comes in through the ETF mechanism. So they would give us the shares of the basket. We would give them shares of the ETF. And on the other side, when they want to redeem those ETF shares, they bring the ETF shares in.

And you have to hand out stock. And the stock you give them is high-cost basis stock. 100%. There we go. Yep. OK. And that's how it becomes more tax efficient, even to the opened-end fund shareholders, because it's all part of the same money. Same pool of money, yeah. Very good.

And I always thought that was fascinating. And I read the paper that I think it was Gus wrote on this back, I don't know, 2000 or whenever it was, where then you went out and got a patent on this. And now the patent has come off, has it not?

The patent has expired. And I think there are a couple of asset managers that are doing it. I think DFA is looking at it. Yeah. Interesting. Well, very good. I'm curious. We did mention the index. So the index that the Total Stock Market Index Fund tracks now is the CRISP Total Stock Market Index.

And CRISP is-- well, we call it CRISP. It's the Center for Research in Security Prices, which is owned by the University of Chicago. Currently, 3,800 stocks in that index. But it wasn't always that index. I mean, back in the day, it was the Wilshire 5,000. And then it turned into an MSCI index for a while.

And then it moved over to the CRISP index. So these indexes do change once in a while. That's a huge event for your desk when an index changes, correct? Correct. And what do you have to do? How do you get it aligned? Well, lots of times-- so I remember those days, Rick, where we had the Wilshire 5,000.

And I think going from Wilshire to MSCI, there were reasons that we had concerns about Wilshire, which back then-- I mean, index methodology has become somewhat commoditized now. It's got little flavors on the margins that are a little bit different. But in terms of just the basic-- and Gus contributed to this in a paper he wrote back in the early 2000s as well.

But for example, a simple thing like float. So let's say, for example, you have a company, a biotech company, and the insiders own 80%. So really, there's only 20% of the shares outstanding or available to the public. Wilshire would say, nope, all the shares available to the public. So when a name got added, you had indexers trying to buy as if there was 100% of the shares outstanding available.

And we would cause huge impact on these names. So the idea of float adjustment came about. And MSCI had some things that we thought were desirable. So we moved. But when we move from one index to another, it's a big deal. And oftentimes, it takes months to convert from your existing-- here's your current index-- to the pro forma, the one that you're heading towards.

It needs to be done. I mean, because ideally, what you're trying to do is do it without realizing gains, without having any kind of substantial tracking error. And CRISP, when we moved to CRISP, I think that was primarily for cost certainty. So as you guys know, when I started at Vanguard, I think our average expense ratio was around 30 basis points.

And it's come down to, on an asset-weighted basis now, around eight basis points. And I think Vanguard felt like, hey, if we're offering funds and we're giving investors the benefit of economies of scale because of our size, we had this index licensing thing out there that we felt like we need to get this under control for the long term so that we're not-- like, if you think about VTI, it's got a three basis point expense ratio.

It wouldn't make sense to be paying a licensing fee close to that number. So I think with CRISP, we got a long term where we got cost certainty. And it also helped that CRISP's methodology, we thought, was best in class. MSCI is still really, really good in terms-- we use it for the sector funds.

But as I mentioned, a lot of the indexes have become somewhat commoditized now. So you've got 3,800 US stocks in the CRISP index, of which you own all 3,800? Give or take. Yeah, there may be some at the very bottom decile that just trade by appointment. That's where I actually want to go to.

So how many of these 3,800 stocks are actually liquid? You could go out to the market. You can buy them. And how do you handle those trades? And then how many of them are illiquid, where you've got to handle them differently, and then explain that process? Yeah, great question.

So I would say the top 1,500 names, very liquid. No issues at all trading them. If you have a-- like that list I mentioned yesterday for Activision, when we had to spend all the cash from it. When I generated a trade list around 3 o'clock yesterday, I think I had 1,400 names, and very, very liquid names.

The issue and the names that I spend most of the time trading are the tail, the exact names that you referred to, Rick, which are the ones in the bottom, say, three deciles, 7, 8, 9, and 10, the ones that are very difficult. And what we do there is, every Monday morning, we'll come in.

I'll run a $200 million list of those names that are-- so we have the ability to basically say, on our trading platform, to say, I want to generate a trade list, but I want you to focus on the bottom four deciles. And by deciles, you mean-- so we rank them 1 through 10, the ones that are the most liquid.

Apple would be up in decile 1, all the way down to the bottom. And then focus on those. And those are the names that are really bad. And then what we do is we break it up between five or six traders. So every trader gets 40 or 50 names.

And we keep them out there for the entire week. And I tell the traders, let's be opportunistic. So in the US, we have 16 different exchanges. We have 40 pools of liquidity. So it's a little bit like whack-a-mole when you're trying to trade one of these names. You don't know where the seller is at.

We have access to brokers who focus just on illiquid small cap names. We have-- we'll run these names through all sorts of dark pools, ATSs. If a broker happens to be doing a small cap rebalance where maybe a manager is getting out of some small cap names, they might call and say, hey, we've got a lot of small caps on our pad today and see if we can get a match with those names.

And for the entire five days, we'll just focus on those. And then the bigger names, Rick, those are the names that we will, if we have a trade list, cash coming into the fund around 3 o'clock is when we'll generate a trade list. That's when we're buying the Apples, Microsofts.

And those are the easy names to trade. It also is very nice that the most liquid time of the day in the market is that last 45 minutes. I think 25% of the total day's volume is in that last 25 minutes. So you're trading when the spreads are the narrowest and the top-of-the-book liquidity is at its greatest.

So it is very easy to trade in that type of environment. But that's kind of how we get the exposure to the small cap, running that list and then being opportunistic if there are small caps available. And those are names we'd be happy to get an execution at 10, 30, 11 in the morning.

It doesn't matter. Because they're such tiny names in the index, it's not really going to impact at all. Let me ask a question about new issues, IPOs, brand new companies coming to the market. Now, they don't go right into the index right away. That's right. It takes a little bit of time.

Like you said, Chris adds them periodically. Yeah, so on that, Rick, if it's large enough, Chris will add it in five days. Five days for a large IPO. And that's incredible, because back in the day, it sometimes would be three months, six months. And considering our size, if you have the ability, there is this massive liquidity event when an IPO happens.

And you probably saw it this week with Birkenstocks, even though it wasn't added to any of the indexes, because it doesn't have a US domicile, or it's not incorporated in the US. So I'm not sure where it's going to end up. But you have this massive volume rush. And to be able to trade in that is really beneficial, because you're not going to have impact if you have size to do.

But if that name gets added to an index in six months, when the volume has kind of dropped off, you potentially could have a lot of impact. So Chris adds within five days. And then some of the other index providers, you might have to wait until the next rebalance.

And now it might be December before an IPO would get added. 2023, 2022, relatively quiet times on syndicate and IPO. Back in 2022, we participated in over 400 syndicate offerings and added over $350 million worth of value added to the portfolios by participating in syndicate and IPOs. So I want to understand this.

When an IPO is coming out, you get the roadshow. And Vanguard, can you buy on the IPO at the IPO price Vanguard? But does it go into index funds, or does it go somewhere else? No, good question. So if it's a large IPO that it's getting added in five days, we will potentially go in for a piece of it.

In the fund itself? In the fund itself. Even before it's in the index? It has not been added to the index yet. Now, we know it's going to be added in five days. Now, do we go in for the full amount? Absolutely not. We might go in for a small portion of our order and take advantage of the IPO price.

Now, it's not an automatic, hey, there's an IPO coming. You guys are going to go in on it. We do analysis of it to see how many times oversubscribed it might be. If it's an IPO that feels like it's going to be a little flat, we're not going to have any part of it.

But if it's multiple times oversubscribed, then we have the ability to go in on the IPO. We will go in for a portion of our order, knowing that the bulk of our order is going to be bought in five days time when it goes into the index. But wasn't this active management?

No. We see this as a value-add strategy, as long as it's done in a risk-controlled manner. But nice try, Rick. Well, I was always wondering about big IPOs. I know they're going to go into the index. And I know that a lot of them pop as soon as they start trading in the secondary market.

And I was like, gee, are we able to participate in that through indexing, even though they're not in the index set? And your answer is, sometimes, at the discretion of Vanguard. Right, and it would be-- I mean, sometimes, you could put in for a large order. You might get a very tiny piece of what you're looking for, just because of it.

But yeah, you do have the ability to go in on them, especially if they're getting at it. Now, if an IPO is not getting at it for three or four months, that's a whole different story. Well, let me ask a question about this, then. So you're going to get a share of the IPO that you know is probably going to pop, and you like it.

It's oversubscribed by however many times it needs to be oversubscribed for you to like it. But you have all these different funds out there. How do you decide who gets it? Yeah, so we prorate it, basically. Oh, you do. You do prorate it across all of the-- so for example, if it's crisp, and we know it's getting at it in five days, we're going to know, based on the size of the company, is it going to be small, is it going to be mid?

And based on that, the good thing about total stock is it's almost involved in every one of them, because it is the entire market. But in terms of total stock, if it's small cap, small growth, they all get a portion of it. It all gets-- Based on the size of the fund?

Based on the size of the fund and the weight in the end. Yeah. All right. Well, you know, I know you use some derivatives during the day. Like, at the end of the day, you have a lot of cash. You need to equitize that cash. Talk with us about how you might use the futures markets versus the cash markets to square up your portfolio, if you will, by the end of the day.

So futures are incredibly helpful. Now, I would say, ideally, we hold no more than maybe 30, 35 basis points worth of futures in total stock market. And the reason we use futures is multiple reasons. Number one, when stocks go ex-dividend-- so say, for example, today is a Monday, and a stock goes ex-dividend tonight, we need to spend that ex-dividend amount on the close.

And some days in total stock market, that can be $200, $300 million worth of names in the portfolio that are going ex-dividend. We need to spend that. The difference between ex-date and payable date can sometimes be two, three weeks. So it goes ex-today. We don't get paid for three weeks.

If we had no futures in the fund, and we spent the ex-dividend, it's no different than if you guys spent money you didn't have in your bank account. You get hit with overdraft charges. And when rates were zero, overdraft charges were no big deal, right? But now that rates are 5%, 5.5%, the banks are coming back and say, hey, you overdraft.

Here's what you owe us, because you spent money that you didn't have in your account. The beauty of the futures is that they kind of give you a cash cushion in your fund that allows you to spend the dividends without overdrafting. So that's one of the nice things about it.

The other thing is that, believe it or not, we get calls at 358 to say, you either have cash in or out of your portfolio. It's physically not possible to generate a trade list and get it down to the floor in two minutes. Who do the calls come from?

Within Vanguard, we have a large transaction area. So any institution maybe that was bringing cash in, it would get funneled through. And then we would get notified, hey-- And you wouldn't get notified until two minutes before the market closes. It has happened. Now, do we ask for that? No, we say, hey, listen, please let us know by 3 o'clock.

But it does happen. If it's a large purchase into the portfolio, we have the right to reject it. If we don't think we can equitize it in time and get it in, we have the right to say no. We cannot say no to a redemption, so a redemption we have to honor.

So if we had a redemption in a fund, one of the nice things about having futures in the fund that we can sell futures. So I can sell the futures to fund that redemption that was called in late in the day. We also use futures if you're just trading and you have a rebalance where you have buys and sells, and you're trying to stay market neutral.

If one side gets ahead of the other, say your buys are very liquid, your sells are not so liquid, you can sell futures to keep yourself dollar neutral in terms of trading in the market. So they are a great tool to have in terms of trading. But it is a small portion of the overall holdings in the fund.

So it sounds like you've got a busy day. What I'd like you to do, if you could, for us, is walk through a typical day. You get in in the morning, or maybe you've thought about it on the way in. What does your day look like from when you get in, what time you get in, all the way through until you leave at whatever time you leave?

Yeah, so one of the ways that you have really tight tracking is to make sure that you're 100% invested at all times. In addition to having the exact weights in your fund to the benchmark, you need to make sure that your fund, you're sitting on-- when you come in in the morning, in an ideal situation, your fund says zero in terms of your liquidity.

It never happens. You're either sitting on $10 or $15 million, or you're over-invested. So the first thing you do is tie out all of the activity that got processed overnight. Does it make sense that my fund is sitting where it should be in the morning? And I will sign off on that as the portfolio manager.

And then we have someone from our risk area that will sign off on that. And then we have somebody on the desk that is basically overseas, a desk supervisor, to make sure that all of the index changes, all of the cash flow is got. So there's three sets of eyes that will sign off on my portfolios in the morning.

That's generally completed by about 9 o'clock, 9:15. Before I even get in, there is a team from our data team that pulls in all the indexes from all the different index providers. And they make sure that the indexes that I'm looking at on my screen when I log in are exactly the same indexes that CRISP is giving out, that S&P is giving out, so that we know that, foundationally, we're tracking the right benchmark.

And there are numerous corporate actions, splits, reverse splits, all kinds of things that might be happening that those indexes need to account for. And making sure that our indexes are good is really, really important. So when we tie out everything by 9 o'clock, 9:15, market opens. And then we start thinking about what's happening today.

And so we have notifications that come out from CRISP, from S&P, from FTSE, from Russell, saying, hey, here are index changes that are happening on the close tonight. And our goal then, Rick, will be to make sure that we position those portfolios to make sure that at 4 o'clock, our funds are identical to the index.

Any index changes that are happening, any syndicate offerings that might have happened overnight, we factor those in. Any Dutch tenders, any kind of corporate actions, all of that over the course of the day is-- we'll have meetings about-- we do a-- we generally will have one person on the desk becomes kind of the quarterback for a particular index change.

So all of the information where brokers are calling us to say, hey, we know there's an increase in the shares tonight. We have a seller of this name. You funnel that all to whoever happens to be the trader that is responsible for that. So that person kind of becomes the expert.

And before you know it, it's 9:30, and all of a sudden, it's 3:30, and we're getting ready to send trade lists down to the floor. And in between, we'll have meetings. We have-- I'm on a number of committees. For example, ITAC committees with New York, with NASDAQ, market structure-type issues that might be coming up over the course of a day.

So there's-- it's incredibly-- no day-- no two days are the same. So even though there might be things that you think you have to do when you come into work, like I mentioned yesterday with Activision, that was unexpected. I think most people thought it was going to close next week.

But all of a sudden, yesterday I come in, and we have 20 of us huddled around the table at 8 o'clock in the morning, figure out, how do we handle this index change tonight? And what are the repercussions across all our portfolios? And before you know it, you're getting ready to trade at 3 o'clock.

Well, I'm going to-- I have one more question, but before I do that, if people in the audience have questions-- Mel, where's Mel? Mel? There's Mel. You could hand your question that you have. Just write it down on a piece of paper. Hand it to Mel, because we do have 10 minutes for Q&A at the end from the audience.

So there is Mel. He can get up. Mel, get up. And walk around. And hand him your question. OK, so here we go with the last question. You know, indexing is an evil, evil thing. At least that's what the media says. It's worse than Marxism, I understand. I mean, you control the universe, right?

I mean, you could bring down the entire financial system. But what do you say to these critics? Well, I would say, listen, think about all of the benefits that indexing has brought to investors. I think since 1993 up through 2021, I think I've seen estimates. Mike shared with me $334 billion worth of savings to investors when you compare the expense ratios of index funds versus some of the more higher active funds.

So incredible benefits. There are just so many advantages that I see with indexing in terms of the low cost, the low turnover, helping people save. I mean, I've had so many good conversations, probably with some of the people in this audience, when bogleheads used to come, when you would come to campus, about people telling me, hey, I worked in this job for whatever number of years.

And I put money away, and I've been in total stock. I've been in index 500. I've been in your total bond. I've been in your total international. And I'm going to be retiring at 52 years of age. And I can't tell you how good that feels. So it does irk me a little bit when I hear people bashing indexing.

Because I look at all the benefits that it's brought. And listen, we have all the assets that you talked about, Rick. But at the end of the day, it's this audience. It's your money that we are managing. And we are incredibly privileged to be in a position to manage the money for investors like you.

And we have 50 million shareholders that we take that incredibly seriously. The argument-- I've heard that indexing, it doesn't really contribute to price discovery. So that potentially, you would say, well, if there are disparities in price, it should be a gold mine for active managers. It should be so much easier for you to outperform.

And we haven't seen that. It's incredibly difficult to outperform the markets. It's a zero-sum game. For every dollar that outperforms is a dollar underperforming. And when you factor in cost, it's just incredibly difficult to outperform. And I think a lot of these articles that have come out bashing indexing, I think if you dug a few layers, if you peeled a few layers, I think you'd find that there are people probably not happy that they're losing money.

You look at the cash flows. Investors understand, if we look at where the net cash flows have come, it's to that lowest quartile of expenses. $1.5 trillion has come in since the '90s, whereas if you look at the two, three, and four quartiles in terms of expenses, that has been a net outflow of $1.6 trillion.

So investors understand that, as Mr. Bogle used to say, you get what you don't pay for, right? So we're very proud of what we have. We understand what a privileged position we have to manage money for 50 million-odd investors. And yeah, we think indexing has a long way to go.

Yeah, Rick. So while Mel is making his way up to the podium-- Make your way up to the podium, Mel. Got one last question. You told me this in an interview that I did with you on the Bogle Heads on Investing podcast that it's a misnomer that index funds are doing a lot of trading.

In fact, you trade very little amount of the shares that are actually traded on a daily basis. Could you just hit on that one? Yeah, absolutely. So if you look just a normal day, probably index strategies account for less than 5% of the trading that's out there. Even yesterday, when I mentioned Activision-- and let's say Total Stock wasn't the only fund that was trading, but maybe in total, our desk might have traded around $3 billion yesterday.

That sounds like a ton of money, and it is. But over the entire stock market, if you look at what traded yesterday for stocks and for ETFs, it's probably in the $600 to $700 billion. So that $3 billion is less than half a percent of the average volume. So one of the really good things about indexing, Rick, and we talked about it on your podcast, was the low turnover.

So even Total Stock, which is, as you mentioned, the largest fund, when I have rebalances, they're small. So the total turnover is less than 10%. So turnover is the average assets. If you look at the lesser of buys and sells divided by the average assets in the fund, it tends to be below 10% a year.

Active managers, you can have turnover 70%, 80%. And believe me, that's not a tailwind. When you're turning over a portfolio like that, you're incurring transaction costs, commissions, taxes. And we really don't trade unless we have to trade. And so one of the beauties of indexing is the fact, Rick, that you do have such low turnover, incredibly tax efficient.

And it's a tough benchmark to outperform. I got a lot of questions in a lot of different areas. I will say that I'm just going to ask Jerry the questions that actually pertain to him. Questions like, will this be available by Vanguard? Or is Vanguard going to start offering this fund or that fund?

He wouldn't know, honestly. And I'm not going to do that. So I'm kind of trying to stick with his area here. So first of all, do you also, on your desk, do international stocks? So the way our desk-- we have about 25 people on the desk. And it's roughly 13 on the domestic side and 12 on the international.

So we kind of have dollar, which is the side that I'm on. And then we have non-dollar, which people like Mike Perry and Jeff Miller and Christine Franquan are the people who would focus on the international side of things. And that side of the desk does a ton of work with our trading desks in London and also in Australia.

So if they have European names that they're trading, they're sending those to the London desk and trading. And we have about 12 traders in London, similar amount of traders in Melbourne. And the Melbourne traders, those guys would trade all of the Asia-Pac names that we're trading. So over the course, we have this concept of kind of past the book.

So we'll generate a trade list in Melbourne, send it out to our Melbourne desk. They will trade the Asia-Pac names. When they're done trading that, they will pass it on to the European desk in the UK. Europe is done. They will send it back to us. And the international side of the desk then will trade Canada, LATAM, those types names in a global portfolio.

So we do have an international side. I just don't happen to be on that side. I'm on the domestic side. And on the international side, do they go through the same process that you go through on the US side, as far as when they're trading and so forth? Yeah.

I mean, they would interact. There's probably more trading done on the domestic side, because on the international side, they're generating trade lists. But then they're sending the trade lists to the desk, to the local coverage in London for European names and for Asia-Pac. But the concepts would be the same.

The risk metrics, all that kind of stuff would be very, very similar. Yeah. So this, I know, is not in your area. But I'm going to ask it. It has to do with voting proxies and Vanguard, BlackRock, State Street, all being the big three. When you're out there trading stocks, do you run into BlackRock trying to do the same thing and State Street trying to do the same thing?

There's three big index providers out there. And you're all trying to jockey for the same stocks at the same time. Do you see those trades out there? I mean, how does that affect your trading? Well, if you think-- so I'll give you an example, Rick. So we mentioned Activision last night, right?

So it got deleted. S&P announced that they are going to replace Activision in the 500 next Tuesday by Lululemon. So there's going to be lots of Lululemon that need to be bought. And we know that it's probably net. If you factor in all the folks that you mentioned, Vanguard, BlackRock, State Street, everyone else that manages 500, there's probably 18 million-odd shares of Lululemon that will need to be bought.

Now, brokers make a living out of predicting which names they think is going to be added to the index. So Lululemon has been on the list for probably a year now. We know that, in total, we know how much needs to be bought. And we will put together a strategy on Monday morning about, of the total that needs to be bought, we know what we represent.

And we can look at the volume numbers and start to see, OK, it looks like there's people that are starting to front run the order, try and get ahead of the indexing demand for Tuesday. And some of those may be competitors. Some of those might be hedge funds. And all of that gets built into the strategy in terms of, how are we going to buy Lululemon for our 500 portfolios?

But yeah, you're fully aware of it's all out there in terms of the holdings and the assets. So we know, as they know what we have to buy. And then it just comes down to the desk itself in terms of the traders, the experience, the strategies. And we feel really good about the position that we're in.

I've been on the desk. I've been at Vanguard 31, on the desk about 28. Don Butler is about the same. We have probably-- we understand the different strategies involved. And it's our goal to make sure that when a name like Lululemon gets added, that we do it in a way that we feel we can potentially add a little bit of value add to the portfolios, but making sure, above all, that we track the benchmark closely.

And on that point, I've noticed that you're actually able to make up some of the basis points. In other words, if the ETF is three basis points, you actually outperform. Yeah, so this year, year to date, I think we're-- More active management, by the way. Go ahead. I think-- so if you think about it, we would call it value add, right?

So if you think about it, so the expense ratio on VTI is three basis points. The value add, year to date, is about 3 and 1/2. And so it's a combination of some of the things we talked about. Some of it is syndicate. Some of it is complex corporate actions.

For example, there was one large one a few weeks ago. Johnson & Johnson spun off KVUE. We were able to handle that action in such a way that we added $190 million to the funds in terms of how we handled the spinoff, how we elected shares, and how we traded around it.

That moved the dial a little on some port-- not quite a basis point in total stock, but somewhere between 0.6, 0.7 of a basis point. So those types of strategies. Also, our SEC lending. Our SEC lending is securities lending. So you think about a broker wants to short a stock.

They need to get a locate. They'll come to a company like Vanguard and say, hey, can we borrow x number of shares? And they will give us collateral. We then can invest that collateral. And sometimes it's incredibly lucrative. So you're probably familiar with AMC movie theaters. They had a complex corporate action going on this year that everyone was looking to borrow AMC to the tune of it added some massive amounts of money to our shareholders.

Now, we're a little different, I think, in that our securities lending, it cost a certain amount of dollars for that group to run. But all of the money that comes in through SEC lending, take out whatever it takes to run that group. The rest of that money goes directly to the funds that loaned it out.

There's no company or management company keeping a portion of that to make sure their stock price remains at a certain level. It goes directly back to the shareholders. So you have a situation where, in total stock, close to two basis points this year has come from SEC lending. Extended market, it's 15 basis points has come from SEC lending.

A lot of it is related to that AMC because it was so lucrative. But that group, this year, has brought in over $1 billion to Vanguard in terms of loaning out securities. And that money has gone back to help offset the expense ratio. 100% less the cost of the group.

Less the cost, yes. Which is different than other index fund providers where they keep 50% of it. You only give the shareholders 50%. And so in the end, I made this comment yesterday in another-- I said beta is free. Beta is free. And you're confirming that. Yeah, I mean, if you own VTI this year, in fact, you're getting a free lunch.

Free lunch. Yeah. Well, thank you. I think that's all the time we have. Thank you, Jerry. It's been really fascinating. I really appreciate-- Thank you. Thank you, Rick. --you coming in today. Thank you, Rick. Anytime.