What if index funds weren’t as “passive” as you think? In this episode of the Rational Reminder, we are joined by Jim Rowley, Global Head of Investment Implementation Research, and Andy Maack, Head of US Equity Portfolio Management at Vanguard. These two experts offer a rare, behind-the-scenes look into what it really takes to run some of the world’s largest index funds—and it’s far from “set it and forget it.” From real-time trading decisions to managing $7 trillion globally, Jim and Andy walk us through how Vanguard implements index strategies with a precision that rivals any active manager. They challenge the traditional labels of passive versus active and show how thoughtful implementation, securities lending, FX execution, and IPO participation can add real value for investors—even in low-cost index products.
Key Points From This Episode:
(0:04) Why Vanguard’s team was the ideal follow-up to Marco Sammon’s index research
(1:55) Why index funds aren’t as simple as they seem: rebalancing, risk, and strategy
(2:50) “Passive” is a misnomer: why index fund management involves active decisions
(4:42) What excites Jim and Andy about index fund implementation
(7:16) Risk-managed opportunities: how Vanguard adds value during secondary offerings
(8:02) Debunking the active vs. passive label—think in terms of strategy characteristics
(9:41) The subjective calls behind index construction and market definitions
(12:00) The goal of a market-cap weighted index fund and how Vanguard tracks it
(13:28) Why tracking error matters—and when it becomes a business risk
(15:48) Indexing’s advantage: predictable relative performance for portfolio construction
(16:15) The real complexity of daily index fund trading and execution strategy
(17:16) Vanguard’s unique approach: PMs and traders are the same person in equities
(18:52) The scale of VTI: how 24 global PMs manage trillions across time zones
(20:48) Why Vanguard’s culture treats every trade like it’s client money
(22:24) Andy’s story of building Vanguard’s FX desk and the hundreds of millions saved
(24:04) Quant vs. human judgment in index implementation—why both matter
(26:50) How fixed income index funds balance risk, liquidity, and security selection
(27:46) Tools traders use to minimize price impact: algos, limits, and timing strategies
(29:09) How index rebalancing impact has decreased thanks to market evolution
(31:36) The hidden mechanics behind index inclusion/exclusion and price effects
(33:40) Do index funds distort prices? Vanguard’s view on elasticity and ownership
(35:55) Stock dispersion and the case for continued price discovery
(38:09) Why using passive funds doesn’t mean being a passive investor
(43:15) Jim’s research: how “passive” funds are actively deployed by advisors
(50:43) How Vanguard handles IPOs, buybacks, and market composition shifts
(54:45) Active corporate action management: cash mergers, elections, and strategy
(55:27) Responding to Marco Sammon’s critiques on market timing and turnover
(58:55) What would change if rebalancing were less frequent?
(1:00:34) How securities lending and market advocacy add ongoing value
(1:04:42) Should Vanguard launch a flexible, non-indexed total market fund?
(1:06:26) Andy’s biggest concern: system risks and rebalance day challenges
(1:07:08) Jim’s biggest concern: index funds aren’t a free pass—investors still need discipline
(1:08:03) Defining success: alignment with investors and living a balanced life
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Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Dan Bortolotti — https://pwlcapital.com/our-team/
Dan Bortolotti on LinkedIn — https://ca.linkedin.com/in/dan-bortolotti-8a482310
