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Why John Bogle is Dead Wrong about ETFs

Why John Bogle’s is Dead Wrong about ETFs
February 12, 2013
Ron DeLegge, Editor

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 5,000% 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 participants 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 and Author of “Gents with No Cents: A Closer Look at Wall Street, its Customers, the Media, and Financial Regulators” (2011, Half Full Publishing).

Follow us on Twitter @ ETFguide

CommentsAdd Comment

grant8 said on February 18, 2013
  I think Mr Bogle means well but he has definately missed the boat on ETFs. Most of his arguments against ETFs are spurious but his whole mantra of going with lowest expense ratio and traditional index vs. fundamental/active is right on. There may come a day when John Bogle finally admits that ETFs aren't so bad.

What I find curious is how indexing colleagues of Bogle aren't as critical about ETFs. For instance, Burton Malkiel, a long-time associate of Bogle, is on board with ETFs.
tigerr said on February 17, 2013
  Hard to argue with Vanguard data on the subject. Speaks for itself.
indexer said on February 13, 2013
  I suspect John Bogle doesn't like ETFs because he didn't invent them. Maybe he's green with envy?
Bogle's contemporaries like Bill Sharpe (Nobel Prize Winner in Economics), Burton Malkiel (Princeton University), and Jeremy Siegel (Wharton) have all embraced ETFs. These are some damn smart people.

Someday ETF growth may eclipse index mutual funds in terms of AUM. And as Mr. Delegge alludes to, that doesn't seem too far off if ETFs become a major force in 401k plans.
SteamTT said on February 12, 2013
  Great takes Ron. I think Bogle's views are way past old fashion, they're outright incorrect. He cherry picks data to support his claims against ETFs when the evidence is clearer than daylight that an ETF investor could do well, and probably better than an index mutual fund investor.

Also, there's another piece of research you should know. Dalbar did a study on mutual fund investors in an S&P 500 index mutual fund over 20 years. It showed that most of these fund investors earn a return lower than the fund itself because of ill-timed moves. Using Bogle's illogical reasoning, this would suggest that index mutual funds are bad, right? No, the problem is with the investors. Same probably holds true for ETF investors.
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