John Bogle, Vanguard’s founder, objects to ‘fruits and nuts’ ETFs and the market speculation that an ETF encourages. He believes that beginners become smarter investors if they learn how to invest with mutual funds. He has always advocated earning market returns by taking a long-term ownership of a share of all businesses that are making a creating real value—as opposed to speculating on price changes which is akin to gambling.
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Summary of video: ETF investing: Why Jack Bogle Doesn’t Like ETFs
Actually, for long-term investments, Jack Bogle couldn’t care less whether an investor prefers ETF investing or the traditional index funds. At Vanguard they both own the exact same portfolio, and for investments greater than $10,000 the costs are identical. His objection is to those who believe there is an advantage to being able to trade all day long. Speculation is gambling. Anything other than total market funds is another form of speculation.
Transcript of ETF investing: Why Jack Bogle Doesn’t Like ETFs
Janet Novack: The dominance of index funds, I believe 28% of the market, is partly due to ETF which are more than half of that. But I gather you are … It’s not that you have something against broad ETF’s per se, you have something against the narrow ones, the managed ones and the way people are using the broad ones, is that it?
Jack Bogle: That is exactly it and let me just give it to you a little more specifically. First to be crystal clear on this, I couldn’t care less if an investor decides to go into the Vanguard S&P 500 ETF or into the Vanguard—I had to create a word for this, an acronym to go with ETF—TIF, traditional index fund. They both own exactly the same portfolio, they’re both part of the same portfolio, their returns will be identical. They both go for around 5 or 6 basis points at the admiral class level.
Many, many years ago when I was running this place and I perceived a little bit about the future, we put on a pricing thing where you got higher returns as your average investment rose. I think now the admiral threshold is maybe $10,000, so if you got below 10,000 you’re probably paying 10 or 12 basis points. Once you get to $10,000, and they will be identical so I couldn’t care less. If I have a little bias against the ETF it’s because you may say and believe that when trouble comes you will not get out in the middle of the day.
The middle of the day, I mean come on. It won’t be the point of that at all. As long as you avoid that type of thing …
Janet Novack: You can sleep that night. That’s the reason people get out in the middle of the day.
Jack Bogle: Oh wait a minute though, the market went down 300 points in the middle of the day, you got out and it went up 300 points at the second half of the day. I mean a lot of bouncing around is meaningless. In the long run, that’s a nuance, no difference whatsoever. Fine and fine for any broad market index fund which I, in which I would include the total bond market, with some limitation, and the total US stock marke,t and the S&P 500, international, and even if you want to put a little chunk into emerging market funds. All total market funds.
The idea of investing with the fruits and nuts, i.e. it’s just … You know we had it that when these funds started somebody brought out, I don’t think this is much of a name by the way, a fund called Emerging Cancer ETF. First of all it should have been Curing Emerging Cancer or something. It sounds like they were hoping everybody would get emerging cancer. I criticized that particular one in an article I wrote about ETFs in the Wall Street Journal. The guy who started it wrote me, I thought a kind of plaintive letter and he said “Look, I deserve the same chance to try my ideas as you deserved when you started the first index fund.”
Is there a difference between selling quality and selling junk in your first idea? I guess I gave him a nice answer, go for it man. Emerging Cancer is long gone. But have things changed? No, now we have a cloud computing ETF. A cloud computing ETF. It almost sounds like the weather computing the ETF but they’re talking about, I suppose, corporations that are involved in cloud computing which I would have said was every technology company in America but I don’t claim any expertise in that area.
There are these funny little, it’s a great big marketing business. Think of something else no one has ever thought of and therefore at this level, the crazier the idea, and the stupider the idea, the less it is that other people have thought of it. Then you can bet on the market. I know that’s not enough gambling for you so we’ll bet on the market with 100% leverage. Naw, that’s not good enough, 200% leverage, no market there. Bet on the market with 300% leverage. The market will go up 3 times and down 3 times, or down, you have your choice as your investment. What sense that makes is beyond my comprehension.
Footnotes and Credits:
This video is produced by Forbes, Inc. and was uploaded to their YouTube channel on June 5, 2013. I have created a summary and transcript to help you find the spots that interest you and make the best use of your time.
Forbes is an American business magazine owned by Forbes, Inc. Published biweekly, it features original articles on finance, industry, investing, and marketing topics.
The Vanguard Group is the largest provider of mutual funds in the world. Of high interest: Vanguard is owned by the funds themselves and, as a result, is owned by the investors in the funds. Founder and former chairman John C. Bogle is credited with the creation of the first index fund available to individual investors, the popularization of index funds generally, and driving costs down across the mutual fund industry.