Posted on 03/29/2015 7:47:31 AM PDT by Kaslin
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.”
Bogle changed everything.
He probably hates ETF’s because they have cost Vanguard and the industry a fortune in management fees.
Dear Jack,
Thank you for waxing about the ETFs,
Now would you please tell your self-important Vanguard people to fix your metals, mining, emerging markets and energy portfolios.
“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.”
You have to understand a the ways EFTs actually make money for the financial giants that run them. Ever wonder why they encourage investors to buy and sell the funds freely?
The core paradox of an EFT is that it trades freely, based on supply and demand in the market, but is tied to its NAV. How is this done? When the value of an EFT falls below its NAV, the sponsor buys shares of the EFT and sells the underlying stocks, making money. When the value of an EFT climbs above its NAV, the sponsor buys the underlying stocks and creates new shares of the EFT, making money.
So it is in the interest of the sponsor for there to be massive churn in each EFT. Wild buying and selling by investors is likely to create arbitrage opportunities for the sponsor. These profits all come at the expense of investors who think their cost is only a $7.99 trade.
Now you've really got my attention, because those are sectors I follow. So please expand on that. Is Vanguard's problem just that those funds are not beating some recent benchmark, or do you see a deeper problem there?
So what's your track record, Doug? Have you consistently beaten the market averages, costs included? What are you telling investors these days?
Historically, Mr. Bogle's focus has been primarily on costs. Anything that's traded frequently incurs a transaction fee (e.g., broker commissions) at both ends and, if capital gains are involved, taxes. These charges can reduce overall return significantly.
I've done pretty OK with a buy-and-hold approach; but, to each their own.
A mutual fund that has high turnover rates generates more short-term capital gains than a fund with low turnover rates.
Because ETFs are tied to an index, the buying and selling each day still results in the same holdings for the investor.
The author deliberately avoids any discussion about the tax consequences of the frequent buying and selling.
This does not apply to index EFTs. I am talking about the buying and selling of EFT shares on the stock market by investors. Most such EFTs have an fixed composition of assets, such as the S&P 100.
Bingo. The ETF will cause a slow demise of the mutual fund industry.
The buy-and-hold strategy works best for two types of investors: 1) people who can not only live off their current income, but can park large amounts of money for decades on end without needing it, while still having sound cash savings, and 2) people who can invest small amounts consistently throughout their working life while not having to actively manage it (generally through an IRA, a Roth IRA, 401K, or other before-tax plan). Back when I was in the latter category, the open-ended Fidelity Magellan dwarfed Vanguard, thank you very much.
How Peter Lynch Destroyed the Market
http://www.fool.com/investing/general/2010/05/21/how-peter-lynch-destroyed-the-market.aspx
for market timing:
http://www.drachresearch.com/portfolio/
/bingo
The main reason for buy-and-hold is tax avoidance.
If your premise is true - then please explain the close tracking of the ETF performance to that of the index it tracks. If there were tons of money to be made on operating the ETF, then the ETF could not track its index closely.
Buy and hold rides through declines, hell or high water; resistance to selling because one is sure one is correct is just as emotional as panic selling. Market timing relies on analysis as well, not ESP or emotion, but obviously has tax disadvantages.
The “deeper problem” will be for Vanguard. VGPMX, VMMSX... Just throw-aways for a firm that is perhaps rightfully more interested in cultivating new business than in managing existing accounts.
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