John “Jack” Bogle is an icon in the investing industry. The founder of Vanguard and the “father” of index mutual fund investing has had a lot of good ideas over the years. Unfortunately, the ideas in his recent editorial in the Financial Times are not among those good ideas.
According to Mr. Bogle, exchange-traded funds (ETFs) are something that investors should “beware” of. As Bogle writes, “Mark me as a member of a small group of cohorts who are dubious about the utility of ETFs for long-term investors.” Bogle goes on to express some rather bad views about ETFs as merely a great “marketing innovation” where the “only sure winners are the brokers and dealers of Wall Street.”
At the crux of Bogle’s criticism is that ETFs are too tradable, and that the ability to buy and sell ETFs so easily, and at any time of the day, makes them too tempting for investors to do the wrong thing by being too active with their money.
Now, let’s put aside the obvious paternalistic patronizing going on here, which basically insults your intelligence as someone able to make your own decisions. Rather, Bogle assumes that the only proper way to invest is to buy and hold for the very long term. Well, not all investors do that with their money, and I don’t think investors should do this.
Now, I’m admittedly biased here, as I have been employing a trend-following strategy for nearly four decades that’s kept subscribers out of bad bear markets and in roaring bull markets. But still, to criticize the tradability feature of ETFs seems akin to criticizing having too many choices as a consumer.
Bogle also criticizes the turnover in ETFs, claiming some funds have turnover rates of 2,000% to 4,000%. What Bogle fails to mention here is that turnover in ETFs doesn’t affect the holdings the way it does with a traditional mutual fund. Because ETFs are tied to an index, the buying and selling each day still results in the same holdings for the investor. This isn’t the case with mutual funds, which are most often not tied to any specific index.
Finally, I think the biggest disappointment here when it comes to Bogle’s views is that they are dismissive of the innovation and progress in the investment world. When Bogle and Vanguard started the first index mutual fund in 1975, it represented a great innovation.
Now, every month new ETFs are coming to the market that are low cost, easy to trade and easy for investors to get access to markets where they never really could before. Rather than lauding this innovation as a positive, Bogle opts to take the Luddite route and tries to put it down as unfit for investors.
My response to this can be summed up by the great Victor Hugo, who wrote, “Nothing is more powerful than an idea whose time has come.”