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.