This content is from: Portfolio
Vanguard to Implement First Blockchain Project Next Year
Starting in 2018, the index fund giant will use blockchain technology to update its indexes in real-time, which it hopes will reduce both costs and human error.
Vanguard Group will be able to update indexes it uses to manage some of its passive funds in real time as part of its first project that uses blockchain technology, the firm announced on Tuesday.
Blockchain is a distributed ledger, or spreadsheet, that records financial transactions and other information. The information in the spreadsheet then gets duplicated across a vast computer network. Vanguard, which plans to go live with the system in early 2018, is working with blockchain technology vendor Symbiont and the University of Chicago’s Center for Research in Security Prices, which provides historical and real-time market data, for the project.
As the world’s biggest passive fund manager, Vanguard uses indexes to guide portfolio managers in the buying and selling of underlying securities. Vanguard, which has been testing the new technology with Symbiont and CRSP over the past several months, currently handles changes to its indexes with a mix of manual and automated processes designed to keep up with near-constant changes to the securities that are included in any index. Vanguard staffers, for instance, check private web sites, interpret changes, and manually post updates for waiting portfolio managers and traders.
“This is one of those areas where the capital markets function inefficiently,” says Warren Pennington, a principal in the investment management group at Vanguard. “We manage our index funds off of this data, so this is a good first step into blockchain for us.”
Using blockchain technology, Vanguard and CRSP will be able to instantly exchange information on any changes to the index. Vanguard has about $1 billion in funds tracking CRSP’s investable indexes.
[II Deep Dive: Why Vanguard’s Smart Beta May Unsettle Its Rivals]
“We wanted to get rid of all that manual work and get a real-time reflection of the indexes,” says Pennington. He says the blockchain-based system can ultimately be opened up to other asset managers as well.
Vanguard hopes to lower its costs by using blockchain, as well as eliminate the human errors that are now inadvertently introduced into the process. Pennington emphasizes that the firm expects other innovations to happen as the result of its use of blockchain, although he says it’s too early to know exactly what that will look like.