Thu, 13 Oct 2011
For many investors, the proliferation and tradability of ETFs serves as an unnecessary diversion to an otherwise sound investment program, says the Vanguard founder and former chairman.
Benz: I know that you have been an outspoken critic of the proliferation of ETFs, especially the very narrowly focused ETFs, but I think someone could step back and say, well there are arguably some tax benefits of equity ETFs anyway, and now that investors can trade commission free in some cases, why are they so bad? If I buy a total market ETF, why is that a negative?
Bogle: Well, there is no reason in the world that buying a total stock market ETF and holding it for the rest of your life is a bad idea. At least at Vanguard, you are going to pay the same six or seven basis points that you’d pay if you had over $10,000, which I think is the threshold now for Admiral shares, you'd pay the same price for not having the ETF.
So, what’s the matter with having the flexibility to trade? Well, I think you can argue nothing is the matter with it, except it’s there and it’s tempting. I always thought being able to get your money out when I first learned about this industry 111 years ago, or was it 211 years?, I thought it was remarkable, you could take your money out on any day, and now it’s any second.
So, how much of that is going on in ETFs? ETFs by the long-term investor looks to be fairly small, and you can do a lot of things with them that are not self-destructive, but the overall picture is very, very high turnover. I mean there’s an emerging-market ETF from iShares, I think theirs is about 1,200% to 1,300%, less than the [S&P] 500, which is a big speculative thing for institutions often. And the same thing for Vanguard; it's lower, but not a lot lower, it's like 700% to 800% a year. So, the trading is going on there, and it is that which I object to. So it’s using a long-term investment and trading it.
And then I also think it's just very foolish to allow investors to make their choices. I like technology, so I’ll get out of my financial stocks, get into technology, and then into, I don’t know, consumer goods, ... energy, health care. Because the record is very clear, that the investors in ETFs don’t earn anywhere near as much as the ETFs themselves do. In other words, we know what the returns on those various indexes are, and in ETFs, the investor falls, I think the last time I looked, ... the average return was maybe ... 4%, and the average ETF investor return was minus 2%--a 6% gap. That’s an awful lot, and you compound that over a decade, and it’s really futile.
There may be some people that have the answer, but I am still, Christine, a stay-the-course kind of person. Don’t let all these little diversions get in the way of a sound investment program.
Benz: So, do you think that there any structural remedies to help combat that speculation that seems to run rampant in so many areas?
Bogle: I guess what I would say is, I think the people who are betting on these ... it’s so interesting that we had a way to leverage the market 2-to-1 and then a way to leverage it 2-to-1 on the downside, and that proved to be inadequate. The competition took it up to 3-to-1. Well, that is just a sheer unadulterated gamble. Should it be banned? I don’t know how you ban it, and I think the people that are doing it are well aware of the hazards, and so, let them do it. I think I might, in some cases, put a red bold-faced type legend on the cover of the prospectus, which these people don’t get anyway, and say, these securities are very risky. But I think most people are aware of that, and they just make bad choices.
So I don’t see how we can really do much in the way in the regulation to limit them. I do think there are an awful lot of things that are going on in this area, which we see in UBS' case, of speculation within the dealers group, and we also see a certain amount of fraud surrounding ETFs. So I think of a Goldman Sachs partner earlier in the year, who got in trouble for trading ETFs in the wrong way. I am not sure exactly what he did. And when you get this activity, these frenzies, ... and this interest in finding an easy way through a tough market in a tough economy, and that’s what breeds speculation.
So, it surprises me, we are so far away from the original index idea, that first index fund, Bogle's Folly as it was called, which was buy-and-hold forever. And now it’s buy and ... as the original SPDR ad, as I’ve often quoted, "Now you can trade the S&P 500 all day long in real time," to which my consistent response has been, what kind of a nut would want to do that?
Benz: Surely they have better things to do with their time.