Too much trading in ETFs, says Bogle

-- | 24/10/2018

Page 1 of 1

Christine Benz: Let's talk about exchange-traded funds. You've been critical of them in the past. You showed some data yesterday looking at turnover within ETFs. A lot of people use them for fast trading, and you've been critical of them mainly for that reason. It seems like maybe you're softening a little bit, that you think for a buy and hold investor, an ETF can work just fine, right?

John C. Bogle: I am softening a little bit. Can you imagine Bogle softening, but not in the way you suggest.

Benz: Oh, you're not getting soft. I'll say that.

Bogle: No, no; meaning that that kind of a consequence, investors trading and so on, the trading is the investor's enemy. Let me clear on that, and that's a fundamental principle of mine. Not in that way. It was at a Morningstar conference not so many years ago, maybe 25, when I said ETFs are like the famous Purdey shotgun--great for killing big game in Africa and great for suicide.

It all depends on what you want to do with the gun. I'm afraid there's too much trading in ETFs, but I also see that maybe I was too tough on the fact that there can be and is legitimate uses of ETFs.

Without the ETF, I think it's fair to say that robo-advisor industry, which is bringing costs down and using more technology--I hope not too much because that won't give the answer, either--but it's enabled that to be a business. It's enabled us to sell index funds in a lot of different venues very easily because you don't have the same registration problems.

They're listed securities that just trade, and there's a good side. As I say in the book, if an investor should try to figure out whether they want to own the Vanguard 500 traditional index fund, which I call a TIF, traditional index fund.

Benz: I like that.

Bogle: Nobody else does, so I appreciate that. The Vanguard ETF is an indifferent decision, ETF versus TIF. When you get any of this reverse leverage, all these games things, all the crazy, crazy new ETFs that are starting up--we have a vegan in ETF, I don't know what to do quite about that; I'm not a vegan, and I think there must be room for vegans, but the idea that stocks associated with veganism will somehow--veganism is, I guess, my word--it's opportunistic marketing.

Somebody wants to come in and make a lot of money at the expense of the investors who put their money in, because, don't forget the gross return on the market minus cost is the net return to the investor. Some of these pricings are very, very high, particularly relative to other ETFs.

Yes and no, but there are good uses of them. There's still an awful lot of evidence that the kind of funds that are brought into it are bad, and the way investors are using those funds are bad. You have this concentrating of the S&P 500 SPDR and other S&P 500 funds, it turns over I think 5,000 per cent a year, it's institutions trading money with one another. Is there anything the matter with that? I don't really see anything the matter with it, but does it have any social good? I don't see it has any, and it's a business that frankly bores me.


This report appeared on 2022 Morningstar Australasia Pty Limited

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.