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Why ETFguide Was Dead Wrong About John Bogle


John Bogle stands by his statement that the ETF is the "greatest marketing innovation" of fund industry so far in the twenty-first century.

More Negatives!
And, no, Mr. DeLegge, locking up customer's money until the end of the day is not "the real tyranny," and the ability to "buy and sell in real time" is not an improvement. It has been well established that investor behavior is counterproductive. Independent academic studies clearly show, time and again, that the more trading by investors, the worse their returns. But that behavioral flaw is not the only negative for (especially) ETF traders. All that alleged intraday liquidity for ETFs can vanish during market plunges, just when liquidity is needed most. The Economist estimates that in the 2010 Flash Crash, "60-70 percent of the trades that subsequently had to be cancelled were ETFs."

Further, ETFs can trade at significant premiums or discounts from the value of their underlying securities, especially in ETFs that invest in less liquid securities, like junk bonds or real estate. These potentially wide spreads can further erode investor returns (while, admittedly, providing a bonus to those lucky enough to be on the "right" side of the trade). This is not so in TIFs, which always trade at the actual market value of the underlying securities-the fund's daily closing net asset value (NAV).

To his credit, Mr. DeLegge does not repeat yet another canard about ETFs: that they provide lower cost and greater tax inefficiency than TIFs. Yes, nearly all ETFs provide lower costs and greater tax efficiency than actively managed mutual funds, but only a few provide lower costs than TIFs. Vanguard, of course, sets the low cost standard and the tax efficiency standard. Our major TIFs and ETFs (Admiral Shares, $10,000 minimum) carry identical expense ratios (0.05 percent for our larger U.S. equity funds, for example). Whichever class of shares they hold, they own identical portfolios and own them at the same low cost.

"Present at the Creation"
In my 2012 book, The Clash of the Cultures: Investment vs. Speculation, I tell the complete story of the pros and cons of TIFs and ETFs. I also candidly recount the 1992 visit I had with the late Nathan Most, creator of the ETF. This fine gentleman, now deceased, showed me his plan: to enable investors in our pioneering Vanguard 500 Index Fund to trade its shares "all day long, in real time." We had a wonderful discussion, in which I identified some serious flaws in his concept (which he acknowledged, and would promptly correct). But I turned down his proposal. Vanguard 500 Index Fund, I argued, was designed for long-term investors, not short-term speculators.

Do I have any regrets about that decision? Absolutely not! Do I have any regrets about Vanguard's decision, nearly a decade later, to leap into the ETF fray? Again, absolutely not. Our legendary Gus Sauter (now retired) virtually demanded we do so, patented a better way to organize ETFs, and took a conservative approach (none of those speculative fringe ETFs). Our firm has done its best to attract long-term-oriented clients, educate investors about the folly of speculation, and leverage our low-cost standard to force our competitors to reduce their own fees-a trend that is easily observable.

I've often described the ETF as the "greatest marketing innovation" of the fund industry so far in the twenty-first century. I stand by that statement. After all, assets in ETFs now total $1.4 trillion and there are 1,424 ETFs out there today tracking a mind-boggling 1,112 unique indexes (although the vast majority of those indexes are of dubious provenance), challenging investors to pick the one (or two or more) that is right for them. But I've always added this caveat: "whether it is the greatest investment innovation remains to be seen." For institutional speculators, perhaps it is. But for individual investors, the matter is far from settled. Unfortunately, the early evidence is not encouraging. Investor returns of ETFs have lagged the actual returns of the indexes they track by an average of 13 percent over the past five years alone (see page 206 of The Clash of the Cultures). The jury is still out, but the results so far are not encouraging for the ETF cause.

Sorry, Mr. De Legge. I'm not "dead wrong" about ETF investing; and let your followers decide whether or not my comments in this note are "irrational." This letter, I hope, makes it clear that it is you who are dead wrong-dead wrong about Bogle.

Editor's note: This story by John Bogle originally appeared on

To read more from ETFguide, see:

Why John Bogle Is Dead Wrong About ETFs

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