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By Christine Benz | 10-23-2014 08:00 AM

Bogle: Latest Investor Trends Are Just That--Trends

Vanguard founder John Bogle on strategic beta, alternatives, and narrowly focused index funds.

Benz: I'd like to get your take on some of the big trends that we've seen either in terms of fund rollouts or in terms of where investors are putting their dollars. One of the biggest buzz terms in the industry these days is strategic beta or a smart beta. What's your take on that particular phenomenon?

Bogle: First of all, what the devil are they talking about when they say smart beta? I think it was Bill Sharpe who said smart beta is stupid; and I think he is right, by the way. It's just another marketing gimmick with an easy tag. We all want smart, don't we? But it's what this industry has been selling for a long time: management that will give you better performance. And I just don't see that there's anything there except a big claim to be able to do better. Most of it is available through ETFs, because that's the easiest entrée into the mutual fund marketplace today by far. So, I'd say if anybody can explain it to you, find out that before you reject it.

Benz: Do you think investors could reasonably tilt their portfolios? There is certainly a lot of long-term data that points to small-cap value stocks outperforming, for example.

Bogle: Well, it's not going to hurt them in all likelihood. But if you look at the long sweep of data going back into the '20s--and, of course, data are suspect--but there are long periods, 20 years or so, when large do better than the small and when growth does better than value. In the long run, it is correct, if you believe the data, that value does better than growth and that small does better than large.

But I'm of the school that says, if that is proven--and it is, I think, a little bit in the marketplace--if it is proven to be the case, then people will bid up the prices of value stocks and bid down the prices of growth stocks until they reach an equilibrium and then future returns will be the same.

So, I wonder first about the data; second, about trying to rely on something that happened in the past as a forecast of the future. So, I don't think you need to do it. It's not going to be awful. The fundamental thing: It's all the same stocks; it's just the different weights. It's the S&P 500. The Jeremy Siegel dividend thing. There is nothing awful about them. But I would rather bet with the whole market and be guaranteed of my share of the return than bet with either of those two funds: RAFI 1000, I think it's called, and the WisdomTree Dividend (DTN). I'd rather bet that they will do better--because they may do better or worse--and I'd just as soon go down the middle path. It's cheaper. And I think you will be very well served in the long run.

Benz: How about alternative investments? This is a category of investment types where we have actually seen very strong flows over the past few years. I'd like your take on whether such investments are appropriate for most retail investors.

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