Why Is Vanguard Trying To Sell Bond Funds to Young Investors? Paul Calls Out This Weird Commercial

Paul Winkler: Well, it’s that time already. I’m Paul Winkler, this is “The Investor Coaching Show.” Evan Barnard, Dan Hill, hanging out with me. Man, it was like we were sitting here talking about everything, and we were like, “Oh, the show’s starting. We’ve got to get going.”

Evan Barnard: “We’ve got to say something, quick.”

PW: “We’ve got to say something smart really quick.” No, don’t count on it. No, count on it.

News This Week

PW: We’ve got a load of stuff to talk about. This is going to be really fun. Really, really fun. Okay.

So guys, I don’t know where to start. Been a fun week, been a fun week. I had my sister and my cousin in town and hanging out and hadn’t seen them in quite a while, and we were all just going back and forth about the world. It has been an interesting week for the world.

Dan Hill: Yes, it has.

PW: Yesterday, listening to the speech yesterday and going, “Okay, they didn’t get anything done.” I can just tell. It was like we’re putting lipstick on a pig.

I don’t know. What did you take away from that?

EB: From the Alaska summit?

PW: Yes.

EB: Yeah. I think if anything, it showed the world that we’re wanting the war to stop, that the U.S. would like to stop the killing. I think it made that point and that we’re willing to try whatever it takes. Trump’s willing to set this up, and if it turns out, great; if not, he at least tried to set it up.

PW: Yeah. You can’t blame him for trying.

EB: I think he walks away at least … I’d use the word statesman-like, I guess.

PW: It’s so frustrating.

EB: I think the fact that he stated repeatedly, “The war will be over in a da,y” will come back to bite him in the rear end if it hasn’t already.

PW: Well, it has.

EB: But it’s a very complex situation, and it gave the media something to talk about.

PW: Anytime you’re dealing with egos, that is a hard thing, and that is such a challenge. And it’s like you’ve got one person that says, “This is what I’ve got to have,” and, “No, this is what I’ve got to have.” And it’s almost like  irreconcilable differences. Wasn’t that a movie?

EB: I think so.

PW: Yeah, something like that. Okay.

EB: Danny DeVito or somebody in there.

PW: I don’t remember. But it is just such a challenge. But as far as markets go, they just rock on.

EB: New record.

PW: Yeah. They just keep going and they keep going. It was like, I got into this conversation with somebody, and they were talking about how I talk on here about Republican, Democrat, and it’s like, well, whoever’s in power, markets, they’ll do their thing.

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They do their thing, and they go up and go down, and investment managers do their thing, and it’s usually the wrong thing. 

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So we’ll talk a lot about that today.

EB: No shortage of material there.

PW: No, there’s none. Matter of fact, maybe I’ll even start there.

Mutual Fund Manager Commercial

PW: There’s a commercial that caught my attention this week, and what caught my attention about it, guys, was that it was young people in the commercial. Okay, so you got these young people in the commercial, those are the models in the commercial, and this mutual fund company, Vanguard, is doing this commercial on their mutual funds and why you need to choose them as your fund manager.

For those of you who don’t know, we don’t have a dog in the fight. We don’t run a mutual fund company. We’re family advisors.

And it’s not for that reason I pick on anybody, but I pick on people because I think they deserve to be picked on, quite frankly. But here was the commercial that they had on this.

Commercial: This family’s financial future is their advisor, helping them grow their wealth and share it across generations. And behind their advisor are Vanguard’s institutional quality bond funds powered by smart repeatable strategies. Fact is, 90% of Vanguard’s active bond funds outperformed their peers over the last 10 years.

PW: There you go.

Commercial: We can get behind that.

Are you backed by institutional quality bond funds? Vanguard.

PW: Yeah. So institutional quality, in other words, this is the kind of stuff that a pension might use is the idea behind institutional, large amounts of money to get in. Yeah. “We have these bond funds,” and 90% of them beat what?

EB: Their peer group.

PW: Right. Which is a bunch of losers.

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In other words, when we look at investments, when you hear peer group, it’s just the funds out there. 

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And we’ve talked about for 25 years on this show how the way the investment industry, how they approach this process, is just flawed. So to have beaten them really doesn’t say a whole lot, number one.

EB: You’re the fastest kid in the slow school.

PW: That’s right. That’s right. And “It’s repeatable. We got this, it’s repeatable.” I think if we ever said that as an investment firm, we’d be hung up to dry.

To say, “Hey, this is repeatable, your past performance,” you cannot make implied guarantees or anything like that. Somehow they get away with that. Now, number two.

Researching the Stock Funds

PW: Number three, I think we’re up two now, if we look at this, what are they doing? They’re advertising what to young investors and showing young investors in the commercial?

That’s why I talked about the age of the people in the commercial. Bond funds. Bonds funds. Which you would have just about none to very little in a retirement account.

EB: Certainly. Yeah, certainly if it’s for retirement.

PW: Yeah. You would have very, very little. So they did that. So what I did is I said to my son …

EB: Son?

PW: “Andrew, I want you to do some research. What I want you to do is we’re going to go in, and we are going to research the stock funds, which is what they would more likely want to be investing in. And we’re going to look at the stock funds and how they did versus the actual market. Forget the peer group, look at the market, what the markets did in the various funds.”

So what we did is we basically pulled up funds that were at least 90% stock. We had the oldest fund, so oldest share class. So in other words, we just want one fund per share class.

We don’t want the I share class and the investor share class and the Admiral ADM. We don’t want that. We just want the one thing.

So we did that. And then what we did is we looked at all the different funds and we did not want any of the indexes. Because they’re talking about their active strategies here. And you look at that and you say, “Well, if a fund company is doing both — active strategies, stock picking — and they’re also using funds that are not engaging in that, do they have any kind of a rudder that is guiding them?”

EB: They do.

PW: As far as an investment philosophy?

EB: Oh, as an investment philosophy.

PW: Yeah, go ahead. By all means.

EB:

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They can sell them both. That’s the rudder that they have.

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PW: That’s right. Sales is the rudder.

DH: That’s exactly right.

Risk-Adjusted Returns

PW: So we looked at that and we got down to a group of funds. It was 45 different mutual funds.

And we looked for the number of funds that actually outperformed the market segments that they were investing in. Now the number of outperformers was 12 out of all those funds.

EB: What time period?

PW: The 10 years, looking at a 10-year period of time. So we looked at that. Not a huge, long period of time.

If we talk about the data on here, 15-year time periods, and you’ll find that it’s been 92, 94, 96% of funds underperformed their benchmarks, there is the market. So we’re looking at a shorter period of time. So you’d expect a little bit more to outperform. Correct?

EB: Yes.

PW: Okay.

EB: A third.

PW: Now you’ve got about a third. That’s exactly right. So you’ve got about a third outperformed, two-thirds underperformed.

But here’s the kicker. I decided I was going to look at the risk-adjusted returns. So you take the return versus the risk-free rate, is how you calculate the Sharpe ratio, divided by the standard deviation.

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So you’re looking at risk-adjusted returns to determine whether you have outperformance that is actually significant.

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Let’s say I’m getting higher returns, but I’m taking a lot more risk to get there; it’s a hollow victory. Well, what I found when I did that is I found that there were only two of those funds that were outperformers that actually had a positive alpha. Only two. The rest of them had negative.

So basically, we get down to only 16% having a positive alpha, which is getting pretty close to our numbers on what you’d expect for horrible underperformance. And some of the ones that were underperformers, there were several of them that were not just underperformers, they were horrible underperformers.

So hence when you look at this commercial and you hear “90% outperformed and did better,” you go, “Well, wait a minute.” A, they were choosing an asset class that that age group would probably not have a whole lot of money in. Then it was outperforming versus peers, which is no big deal.

And number three, when you look at the stock funds, you see the vast majority of them are underperforming pretty significantly. So Evan, you’ve got this quizzical look on your face.

EB: Yeah. I just want to make sure I heard that correctly. So we had two funds out of 35 that outperformed on a risk-adjusted basis over a 10-year period.

That’s like 6%. I was thinking you said 16% beat their market or whatever.

PW: But that’s of the outperformers.

EB: Oh, okay.

PW: So if you get into all the funds, we’re down to 4%.

EB: One in 20. Yeah.

PW: Yeah. That’s actually a really good point. We ought to make that point. That’s a really good point you’re making right there.

So you’re looking at only 4% out of the entire group when you look at it that way, right? Because you got two out of 45. So yeah, it was pretty bad. It was pretty significantly bad.

So anyway, that’s just it. My point is that when you watch TV commercials and you hear people use data, they will use it quite often to mislead you in significant ways.

And it’s sad, but you have to be buyer beware. And that’s why we spend so much time educating on the show, because a lot of times, the buyers are not terribly aware of what’s going on.

What’s Going To Happen With Earnings

PW: I’ll give you another example. There was a little segment that was done where they had this person from Edward Jones on CNBC.

And they’re saying, “Hey, what do you think’s going to happen for the rest of this year?” And this is basically what this lady said. She had this today.

Interviewer: Joining us here at Post 9 to discuss, Mona Mahajan, Edward Jones principal and head of investment strategy. Mona, thank you for being here. What do you make of Goolsbee’s comments there? And especially in light of what we’ve seen from the data over the past week?

Mona Mahajan: Yeah. Look, he has a point. This economy has held up to some extent. We have seen that certainly in the earnings picture.

We’re looking at 10% year-on-year earnings growth for second quarter, on pace for double digits likely by the end of the year. That’s a great sign for markets. We have seen — retail sales this morning points to it — the consumer has held up okay.

Now to the broader point of the economy, we do think we’ll see a little bit of softening the second half of the year, not recessionary. But really, the narrative has shifted now as we look into 2026.

We’re looking for lower interest rates by the Federal Reserve. We have a tax bill in place, by the way, that will probably start to kick in next year. And we continue to see the earnings growth story playing out in 2026. So not a bad setup as we head to year-end.

PW: Okay. So she’s talking about what’s going to happen with earnings. It’s just how the economy works. Now guys, just in general, comment on earnings versus stock market returns.

EB: Well, it was kind of interesting listening to her. It almost sounded like she was contradicting herself a little bit. “Hey, we’re expecting double-digit returns through the next six months.” So that’s market performance.

And then later on, she’s, “Well, we see this softening in the economy and so forth.” So you would think, and they’re not directly tied, like we talk about, but you would hear that and say, “Oh, there’s a softening in the economy, why am I going to be getting double-digit returns?”

It is playing both sides of the fence to the average listener. Okay. Yeah.

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Even though the economy doesn’t dictate the market performance.

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PW: Yeah, that’s correct.

EB: But it would come across that way to somebody.

PW: Yeah. I could see where you would come away with that. Yeah, that would be a little bit confusing.

Weasel Words

PW: Yeah, Dan?

DH: What I was doing during that, I remember some time ago we did an exercise where we were listening to a bunch of these commercials and seeing how many times they were hedging.

PW: Oh yeah, good point.

DH: She said, “likely.”

PW: Yes. Yes.

DH: Okay. So they’re listening like, “Numbers, oh, double-digit returns,” but, “likely, I think.”

PW: Weasel words, as Jim likes to call them. No, it’s exactly right. That’s a really good point. So yeah, that was what was going on throughout that whole thing.

Yeah, so you listen to that and you say, “Okay, so this person is telling us what’s going to happen in the second half of this year using a lot of language that sounds very sophisticated.” Now, so far year to date, and I’m just talking to the end of this past week, you have international stocks, international small companies, value companies up about 35%.

EB: Yeah.

PW: Not terrible by any stretch of the imagination. That’s three years of return in eight months. It’s 28% higher than the S&P 500, in essence. That’s pretty significant return-wise.

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Now, you would think if somebody really understands where markets are going, they would have a good bead at the beginning of the year what’s going to happen. 

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Now, this is what Edward Jones said at the beginning of 2025. This was their outlook.

Audio Clip: We expect 2025 to be another positive year for international economies and markets. However, momentum may continue to lag the U.S. based on stronger domestic trends in consumer spending, productivity, and corporate profits. While the timing and scope of potential tariffs from the new U.S. administration remain unknown, trade policy uncertainty creates another headwind that is likely to weigh on sentiment and valuations for international equities.

PW: Yeah, there you go. Weasel words, lots of “likely,” “might have.” Yeah, go ahead.

EB: Well, I was just going to say if they got 35% year to date with headwinds, if they’d had a tailwind, where would we be?

PW: Good point.

EB: One hundred eighteen percent by September.

PW: Yeah, that’s right. That’s right. Yeah.

Investment Management

PW: So you listen to this kind of stuff and you think, Well, yeah, they don’t know what’s going to happen. But here’s the thing, folks, recognize that they are using this in their investment management.

They are going to not ignore their chief economists and all these people that are market prognosticators.

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They’re not going to ignore the information. They are going to use it in the management of portfolios. 

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I can’t imagine that they wouldn’t do that. Why would they even have that person on staff if they were not going to use their important-sounding information in the management of the portfolios for their clients, right?

EB: Right. Well, and you think, you have to know that some committee at the firm, whatever firm.

PW: That was Edward Jones.

EB: They’ve got their dancing bear on the TV. They’ve had a group meeting of, “Okay, this is our party line.”

It’s not even just that person coming on, saying whatever they want to say. That’s already been massaged before they ever open their mouth.

PW: Yeah, I totally agree with that. So that’s the issue that I have.

As you look at this kind of stuff, you hear these things, I want people to understand that this is not the exception when it comes to investment management. It is the rule. This is how things are done on Wall Street.

And a lot of people don’t even realize the end investor tends to be fairly disciplined. They don’t even understand that their investment advisors and the managers are not being as disciplined.

And you don’t end up with losses. This is the thing that’s really tricky. It’s not necessarily that you lose money listening to them, because remember what she said, international markets would probably be up. She was right about that.

It was basically that prediction. It was which one was going to do better. And you can imagine that if you think that U.S. is going to do better than the international because of the tariff situation, that you would overweight U.S. in that situation.

Emergency for Europe

PW: We’re back here. This is “The Investor Coaching Show.” I’m Paul Winkler. Evan Barnard, Dan Hill here, hanging out with me in the studio today. So I saw this, and Evan, you did too.

EB: We may have different tastes. This will be interesting.

PW: Nerds of a feather, you said, flock together. That’s pretty funny, man.

“Nerds of a feather.” All right. We’ll have to remember that one.

Okay. “America’s Stock-Market Dominance Is an Emergency for Europe.” I think that is kind of interesting, that what’s happening right now is only six companies have gone public in the U.K. so far this year, which is a record.

It’s a low level for three decades of data. So not many companies are actually going public, which is when you take your company and you try to raise capital outside by issuing stock in a private company. It’s what’s called going public.

And they have companies that are looking at the United States longingly. It was one of the things I thought was interesting in the article. Further down, it was talking about the pay level for the CEOs.

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They were coveting the pay level of CEOs in America versus pay level of CEOs over there.

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And you think, Well, anytime you try to punish CEOs, it doesn’t work real well. You try to tax them to death in your state, they’ll leave your state. You try to punish them economically. That was the whole idea.

I remember first getting securities licensed. And I don’t remember where it was, maybe it was the tax classes we took, I can’t remember. Evan and Dan, you guys may remember this.

But it was the idea of limiting CEOs pay. You had to put a cap on what they could earn. But then of course you ended up with stock options that got around that. They figure out ways around stuff all the time.

Where a Company Trades and Its Profitability

PW: They said that they’re dealing with that issue and companies wanting to go and set up shop in America. What did you take away from that?

EB: Well, I want to start with the headline because if you were just glancing through the journal, you would think they’re talking about stock market performance.

PW: Oh, true. Very true.

EB: And so we have this year where international’s up 30, U.S. is up four or maybe three at this point.

PW: That’s a really good point.

EB: And you were like, “Stock market dominance. Wait a minute.” But then you read through it.

PW: It didn’t even hit me. That did not even hit me. That’s a really good point.

EB: What jumped out at me was making sure that as I was reading that, just to be aware, there is a difference between where a company trades, whether it’s on the London Stock Exchange, the New York.

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There’s a difference between where it trades and whether or not it’s going to be profitable. 

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And so somebody could look at that and say, “Oh, well, I need to get out of international companies because the U.S. stock market’s going to be dominant.” The exchange it’s trading on is what the article is talking about. British Petroleum is still a British company with a ton of profit, but it’s this difference between profitability and stock ownership and where it’s trading. It was just an interesting take.

PW: Yeah. And in Europe, you look at that and go, “That’s where all this stuff started.” All of these trading exchanges and all of those things, that’s the old world where all of this public company ownership started. And now they’re looking and going, “Wait, this newcomer on the block, America, is running circles around us.”

Why Is There a Widening Wealth Gap?

PW: Now, one of the things I thought was interesting, we were talking about, “We are very committed to the U.K. … But the reality, is over time, the investments are moving to the U.S. … European leaders see the withering of these historic exchanges as an emergency — and one of the culprits behind Europe’s economic stagnation, low productivity, and the widening wealth gap between its citizens and Americans.”

What I thought was interesting is: Why is there a widening wealth gap occurring here? And the answer is because of the way Europeans think versus the way Americans think.

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They tend to have a lot of pensions over there. They have a lot of guarantees in their life, whereas Americans don’t.

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So hence, what we tend to do way more than they do is invest in the stock market versus fixed income markets. They said, “A lack of investment hurts European businesses, and starts long before they go public.”

Now, how does it hurt them? Well, if you think about it, you would think, Well, this is going to be bad for investing, as Evan was saying. So I think it’s a really good point that he’s making here.

We think It’s going to hurt European businesses, therefore I really need to watch out about investing in those companies in Europe. When we look at what’s happening, we’re looking at a lack of capital that they have access to, is in essence what they’re saying.

When there is a lack of supply of something, what happens to the cost of that thing? It goes up.

So hence, what is the cost? Return. Cost of capital equals return in investing markets.

And if we’re looking at a lack of capital, we could be looking at higher returns, not lower returns in those markets as a result of it. So just catch what they’re saying and how confusing this can be.

Now, they said that Europe doesn’t have a problem with shortage of money though. And that’s interesting that they said they have an underdeveloped and risk-averse system.

European Union households, they save more than Americans do by far. But their wealth has grown by a third as much because they just don’t invest in markets.

Now think about this, if you’re an older investor and you’re scared and you have a lot of money on the sidelines, if you have a lot of money on the sidelines, you’re having the same problem these European investors are having, and they’re calling it what? An emergency. Isn’t that a funny way of looking at it?

Let’s say Europeans hold 12 trillion of their savings, about 70%, in bank accounts with low yields. Unlike the U.S. that cultivated widespread stock ownership through 401(k)s, they have a lot of state pensions paid out through government budgets and retirement. They don’t tend to do that, and as a result, it tends to hurt them.

So I think it’s just an interesting thing worth noting. A, the headline is fascinating, that there’s some kind of an emergency going on. But B, it doesn’t mean that the stock markets are going to be bad. And C, it’s because of what they’re doing over there in Europe.

They’re hurting themselves, but they’re doing what we see a lot of American investors, older American investors, doing too, shooting themselves in the foot, and they’re constituting it an emergency, which I think is just an interesting choice of words right here, “emergency for Europe.” Don’t let it be an emergency for your household, is my point.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.