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Portfolio > ETFs

Dissecting John Bogle’s Anti-ETF Banter

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John Bogle is at it again.

This time, he took another swing at ETF investing in a Bloomberg interview with Tom Keene. “Only an idiot would trade the S&P 500 all day long,” said Bogle, suggesting that this is the predominant behavior of ETF investors. Is it?

There’s no questioning Bogle’s monumental influence in the field of finance and investing over the past 40 years. But is he infallible?

Let’s analyze Bogle’s anti-ETF arguments.  

1. Massive ETF daily trading volume shows funds are being used to speculate.

The SPDR S&P 500 ETF (SPY) is a favorite target of Bogle. SPY is among the most heavily traded securities in the world and averages around 80 billion shares in daily volume.

If people are speculating with ETFs like SPY – and we know some of them do – does that mean all ETFs should be avoided, as Bogle seems to suggest?

Every single day people speculate with stocks, bonds, and mutual funds. Does all of this speculative behavior in these types of assets suddenly invalidate them as long-term investments? And if not, why should it invalidate investing in ETFs?   

In my interview with Bogle last year, I specifically asked him to explain how elevated trading volume in ETFs hurts long-term buy-and-hold ETF investors. “It’s hard to say it hurts them a lot,” Bogle reluctantly admitted.  

In reality, high trading volume in ETFs is good for investors.  It creates market liquidity,which results in tighter bid/ask spreads. The end result is lower frictional trading costs when the investor decides it’s time to buy or sell.

Does Bogle oppose the lower trading costs that high-volume ETFs have introduced?

2. Narrowly focused and leveraged long/short ETFs have infected the business.

One of Bogle’s chief arguments against ETFs is the rise of specialty ETFs that use leverage, go short or aren’t broadly diversified. Incidentally, these very same types of narrowly focused products exist in the significantly larger hedge fund and mutual fund world; but since Bogle has a special hatred for ETFs, this fact usually goes unmentioned.    

Today, there are roughly 8,700 mutual funds and 1,600 ETFs.

Whatever shortcomings Bogle wants to find in the ETF marketplace, they are simply a microcosm of problems in the much larger mutual fund market – which has been birthing questionable investment strategies since 1924 – well before ETFs were even an embryo!

3. ETFs tempt people to become day traders.

A study by Bogle’s very own Vanguard in 2012, “ETFs: For the Better or Bettor?”, rejected the populist notion that ETFs have converted mom and pop investors into day traders.

“The majority of both traditional mutual fund and ETF investments in our dataset are categorized as buy-and-hold investments (83% and 62%, respectively). This result appears contrary to conjectures in the media that most ETF investors are trading ETFs for speculative purposes. In fact, we found little evidence of speculative behavior in either share structure,” Vanguard’s research team explained.

Why does Bogle conveniently omits Vanguard’s findings whenever he rails against ETFs? Is it because the research disagrees with his arguments?

4. Mutual fund investors are subject to less self-destructive behavioral problems.

Rooted in Bogle’s advocacy of mutual funds over ETFs is the insinuation that mutual funds instigate good behavior among investors, whereas ETFs don’t. How does this pro-mutual fund view – a real doozy – hold up in the real world?

Financial research contradicts the cute but incorrect theory that mutual fund investors (yes, even index fund investors) are behaviorally superior because of the financial vehicles they choose.

10-year study by Morningstar revealed major discrepancies between the actual returns that fund investors get vs. what a fund really returns. Analysis in seven mutual fund categories showed asset weighted 10-year investor returns trailed average 10-year fund returns.

What does this mean?

The data very clearly demonstrates that investors with suicidal tendencies will find a way to self-destruct no matter what type of investments they buy.

“A mutual fund doesn’t make anyone more disciplined than an ETF,” states Cullen Roche, founder of Orcam Financial Group. Or phrased another way: ETFs don’t make anyone less disciplined.

To Sum Up

The biggest weakness in Bogle’s anti-ETF battle may his insistence that ETFs are the instigators for the behavioral biases that get people into trouble.

Do automobiles cause accidents or is it poor driving? Should we outlaw cars? In Bogle’s world, blame the products, not the people who abuse or misuse the tools.

Faulting and singling out ETFs only reinforces bad behavior.

Shouldn’t we be teaching the investing public to take full responsibility for their investment decisions, good and bad? Sadly, Bogle doesn’t do that whenever he scapegoats ETFs for whatever misfortunes people may encounter.  

It’s a good thing Vanguard never followed Bogle’s anti-ETF stance, or the fund group would be stuck in the  Dark Ages, like so many other mutual fund companies. What kind of nightmarish bind would they be in minus the $360 billion in ETF assets they manage?

In the end, John Bogle’s dogmatic views and non-linear logic in his hate campaign against ETF investing is shocking for a man of his stature. 

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