John Bogle suggests that smart investors should learn how to invest using mutual funds to lower the temptation to speculate with market timing. Once you’ve proven to be a long-term investor it doesn’t make any difference whether you use ETFs or mutual funds.
John Bogle says, “using the proper ETF, and using the proper ETF in the proper way, is a perfectly intelligent strategy—just so as long as you don’t fall for their basic selling proposition, which is the ability to get out of the market in the middle of the day.” Market timing and speculation are just gambling. Buy the broad market indexes and don’t trade them. Buy and hold!
Summary of video: John Bogle Says: Don’t Trade ETFs!
For long-term investments, Jack Bogle says using either ETFs or the traditional index funds can be a perfectly intelligent strategy. At Vanguard they both own the exact same portfolio. And for investments greater than $10,000 the costs are identical. His objection is the basic ETF selling proposition, which is the ability to get out of the market in the middle of the day. Market timing or speculation is gambling. Anything other than total market funds is another form of speculation. Buy the broad market indexes and don’t trade them. Buy and hold!
Transcript of John Bogle Says: Don’t Trade ETFs!
Ron DeLegge: Hi everybody, I’m Ron DeLegge with ETF Guide, and we’re pleased to have with us, John Bogle, founder of the Vanguard Group, author of many books, his latest, Clash of the Cultures. Pick up a copy on Amazon. It’s a great book. John Bogle, always great to catch up with you.
John Bogle: Ron, good to see you. Thanks for all the nice things you’ve written.
Ron DeLegge: I appreciate that. Let’s begin with something that you said years ago about ETFs, that ETFs are like giving an arsonist matches. Do you still feel that way today?
John Bogle: Yes. It’s even worse today actually.
Ron DeLegge: Explain for us the reasons why you feel that way.
John Bogle: ETFs, using the proper ETFs and using the proper ETFs in the proper way is a perfectly intelligent strategy just so as long as you don’t fall for their basic selling proposition, which is get out of the market in the middle of the day. Anytime you want to get out real-time, sell them in real-time is a terrible investment strategy. You don’t need to do that. The temptation is there. ETFs like the original traditional investments do offer total stock market, S&P 500, international market, total bond market, maybe even emerging market. They’re perfectly intelligent ways to own them just so long as you don’t trade them, but ETFs make it possible to trade them momentarily so they’re no better than anything else and they have the temptation to be worse.
Actually in Vanguard’s case, the ETF, our S&P 500 ETF owns the same portfolio, identical portfolio, as the traditional index fund, so just don’t trade them. The rest of the business, I’m going to guess, Ron, that out of 1400, 1500 ETFs there are maybe 40 broad market ETFs and they’re larger, SPDR is the biggest of all, but that leaves you 1460 that are in many respects fruit and nutcakes.
Ron DeLegge: Right. That’s a good place is for people to begin, is with the broadly diversified investment or ETFs that follow broad-based indexes?
John Bogle: Provided they don’t trade them.
Ron DeLegge: Right. Talking about trading volume, let me ask you, you’ve mentioned it many, many times about the massive trading volume of these ETFs, for the buy and hold ETF investor, how does that hurt them?
John Bogle: It’s hard to say it hurts them a lot, but when you think about it and people talk about the growth of this great marketing idea. It is a great marketing idea. I doubt it’s a great investment idea because the way they’re used and the kind of funds that are created. These Standard & Poor’s index funds run by State Street called the SPDR turns over 7,500% a year and that’s a lot of turnover.
Ron DeLegge: It is.
John Bogle: I think 10% is too high, Ron. You can imagine what I think of it.
Ron DeLegge: Yes.
John Bogle: Seventy-five… There’s a marginal hurt in a fund with that kind of . . .
Ron DeLegge: For the buy and hold investors that owns that same ETF, they’re not being hurt by that.
John Bogle: The record would show that you’re pretty much right. I think the investors do a little bit worse than they would owning the regular S&P 500 but probably not material.
Ron DeLegge: Final question. If investors are going to use ETFs, what is the right way to do that?
John Bogle: Buy the broad market indexes and not these crazy things like triple inverse leverage, like commodities, even like gold, and very narrow, the Korean market or the single country or a tiny industry segment. The more specialized it is, the less I like it. The choice of ETFs is the large broad market ones and the way to use them for the individual investor in all cases is not to trade them, so buy and hold, buy and hold … Buy and hold.
Ron DeLegge: You heard it from John Bogle, found of the Vanguard Group. Pick up his later copy, author of Clash of the Cultures. I’m Ron DeLegge with ETF Guide. Thanks for joining us.
Footnotes and Credits
This video is produced by Ron DeLegge of ETF Guide and was uploaded to their YouTube channel on July 1, 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.
The video on this page is the best I’ve seen on this topic. It was produced ETFguide and they own the copyright. They have given me permission to embed this via YouTube on this educational website.
The singular aim of ETFguide is to produce hand crafted investment research that makes people money.
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.