Everyone has heard about love at first sight. But what about
hate at first sight? The latter describes John Bogle's long-lasting
hate affair with exchange-traded funds also known "
ETFs
."
Mr. Bogle is a well-known figure. He's the founder and retired
CEO of the Vanguard Group, which manages around $2 trillion in
assets. He's also the man who launched the first retail index
mutual fund in the U.S. back in 1975.
But he can't - or doesn't want to - understand ETFs.
I know this firsthand, because I've had the privilege of
interviewing Bogle several times on my
weekly radio program
. And in every single instance, he's made it a point to demonize
ETFs - even broadly diversified ones with expense ratios lower than
index mutual funds.
In a series of excellent interviews with Matt Nesto of Yahoo!
Finance, Bogle once again took aim at ETFs saying "they're no way
to invest." Let's analyze a few key points of why John Bogle is
dead wrong about the ETFs.
Bogle's Folly?
A 2012 research piece from Vanguard itself refutes Bogle's
theory that ETFs are converting the investing public into day
traders.
Joel Dickson, one of the study's authors and a principal in the
Vanguard Investment Strategy Group said, "Our individual investor
data show that the majority of both traditional mutual fund and ETF
investments are held in a prudent, buy-and-hold manner."
The study, titled "
Are ETFs turning investors into day traders?"
analyzed more than 3.2 million transactions in more than 500,000
positions held in traditional mutual fund and ETF share classes of
four different Vanguard index funds from 2007 through 2011.
Why does Bogle conveniently ignore Vanguard's very own ETF
research whenever he discusses ETFs? Is it because the data
disagrees with his hyper-radical views? Or is it because the
analysis on 3.2 million accounts is not adequately
rigorous?
ETFs 'tempt people to trade'
Among Bogle's chief contentions against ETFs is that they tempt
people to trade, therefore, they shouldn't exist.The same
faulty reasoning probably applies to other areas of life.
For example, what about modern day transportation? Should we
return to the era of horses and buggies because people are tempted
to drive too fast? Who's causing all of these automobile accidents
anyway? Is it cars? Or is it drivers? Only a cave person with a
pre-historic mentality would blame the misapplication of clear cut
advancements like automobiles and ETFs on the products themselves
versus error prone individuals.
The fact that ETFs offer intraday liquidity is not a design
flaw. What's wrong with the transparency of letting people buy or
sell at real time market prices versus unknown net asset value
prices (
NAV
)? Isn't locking up customers' money in a mutual fund until the end
of the day the real tyranny?
Trading Volume
Bogle says the turnover rate (or buying and selling) of popular
ETFs like the SPDR S&P 500 (NYSEARCA:SPY) tops 8,000% in some
cases. But what he omits in his rants is that buy-and-hold ETF
investors are not adversely impacted by any of this. That's because
ETF shareholders are not liable (tax wise and commission wise) for
the trading activity of their follower shareholders. By the way,
that's not necessarily true of the mutual funds that Bogle defends
to the death.
What about all of that evil trading volume?
The very trading volume that Bogle demonizes, in fact, allows
for market participates to successfully execute both sides of the
trade. Think about it this way: What kind of chaos would be caused
by a John Bogle type of stock market of all buyers and no sellers?
Is that the kind of place you'd like to invest? Thankfully, the ETF
marketplace doesn't operate that way. Nor should it.
Bogle's Bias
"An ETF is like handing an arsonist a match," was something Bogle
said way back in 2001. Incidentally, that was the same year that
Vanguard launched its first series of ETFs like the Vanguard
Extended Market ETF (NYSEARCA:VXF) and the Vanguard Total Stock
Market ETF (NYSEARCA:VTI). Like other Vanguard ETFs, the funds
operate as an additional share class of existing mutual funds.
Instead of embracing Vanguard's foray into the ETF market, Bogle
strongly resisted. And he still resists today. Meanwhile, the
growth of the ETF industry has seemingly passed him by, zooming
ahead from a few hundred million in assets to $1.4 trillion
today.
In an admission, Bogle told Yahoo Finance, "The growth has been
much more than I would have ever expected." That's a huge
understatement.
It's fair to say, that Vanguard wouldn't have $250 billion in
ETF assets if Bogle was still running the company. Thankfully,
someone at Vanguard had enough sense to avoid steering the company
into the same abyss as mutual fund companies still holding with a
firm grip on a dying legacy.
Whether he acknowledges it or not, ETFs are an extension of the
index investing philosophy Bogle started back in the 1970s. And
regardless of what he or anybody else thinks, the next phase of
growth for ETFs will be inside 401(k) plans.
None of this changes John Bogle's status as a kind of "Paul
Revere" to the investment world, particularly individual
investors. Even with age, he's still articulate and
relentless in hisfight against Wall Street's selling machine. And
tossed into that mix, are his irrational arguments against ETF
investing.
And through it all, it's still hard to dislike John Bogle. Even
when he's dead wrong.
Ron DeLegge is Host of the Index Investing Radio Show,
Editor of ETFguide.com and Author of "
Gents with No Cents: A Closer Look at Wall Street,
its Customers, the Media, and Financial Regulators
" (2011, Half Full Publishing).
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