Jack Bogle, known as the father of the index fund and founder
of the Vanguard Group, cautions investors not to get too
complacent when they think of mutual funds. While they're more
investor friendly than actively managed mutual funds, there
should be just as many warning labels on
as any other investment product.
ETFs are the biggest thing since the mutual fund. With more
than 1,400 products available to investors and traders, It's now
a $1.4 trillion industry.
On an interview with
Yahoo Finance's Breakout
, Bogle offered some sage advice for those who invest in
Index Funds are Fine
Whether it's in the form of a mutual fund or exchanged traded
funded, a passively managed index fund is still the best way to
invest. Bogle has made a career of advising investors to not try
and beat the market. He considers it a loser's game for the
beginning investor all the way to professional fund manager.
He points to the disappointing returns that most funds
Wall Street Journal
pointed out that in 2012, 65 percent of large cap stock funds
failed to outperform the S&P after fees and expenses.
Further, only 10 percent of 1,991 stock funds tracked by
Morningstar beat their benchmark in both 2011 and 2012.
Sector and Country ETFs are too Narrow
Broad market index ETFs like the SPDR S&P 500 (NYSE:
) might be "just fine" according to Bogle but ETFs that focus in
on specific sectors or countries are more like stock picking and
less like index investing. Stock and bond based ETFs track an
index but if that index is specific to one economic sector, the
investor loses overall diversification.
"Fruitcakes, nut cases and lunatic fringe"
This is what Bogle thinks of you if you're one of the many
that put money to work in leveraged ETFs-products that move at 2
to 4 times the rate of the index they track. These are designed
to be short term trading vehicles that magnify the moves of their
underlying index but consistent with his views of short term
trading, Bogle says, "There's just no possibility or any
realistic way that you're going to win that bet."
The Whipsaw Effect
Finally, he cautions investors to be skeptical of all ETFs.
About 75 percent of ETF inflows come from institutional investors
with the ability to influence the funds' price movements.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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