Bogle: ETF Flows Muddle Valuation, Risk Picture

Christine Benz: Do you think there's a risk that investors today, given the length of this current bull run for stocks, are a little bit complacent about equity market risk? Do you think they've kind of forgotten how terrible the losses were during the financial crisis and it's kind of off to the races with heavy equity allocations?

Jack Bogle: Well, that's a really hard question to answer. We know what mutual fund flows are, and they're very, very heavily oriented toward index funds, which is a vote of confidence basically in American business, and we know they're very negative on managed funds, but it balances out to cash flowing in regularly. The fly in the ointment in all these monthly data we see--which I think can now be safely disregarded--is we have exchange-traded funds and the swings in exchange-traded funds from one month to another in their cash flows are extraordinary. I don't know the exact numbers, but at the market high back in 2007 in the month that it hit its high, maybe, I guess it was April or May maybe, investors in ETFs bought I think around $30 billion in a given month. When the market hit its low or shortly thereafter, February or March of 2009, they withdrew at the bottom about $30 billion. I think maybe closer to $20 billion.

Those two months looked at in isolation, give you a totally misleading impression and of course most of that--I shouldn't say of course but I think you recognize--that most of those swings are in the SPDR, the Standard & Poor's 500 Index Fund in exchange-traded form. We have a market system before us that we've never had before. That makes any kind of forecasting of valuations, particularly in the short term, very, very difficult to do. Then we had these rapidly traded, exchange-traded funds that I think pose a certain risk to the market, although I can't define what that risk is.

I can tell you that we completed a study that is in the book--no, I guess it's not in the book, but in some work I've been doing--showing that in the last 10 years the average traditional index fund, TIF, write that down--that's the number that I'm trying to get everybody to use ...

Benz: Versus ETF.

Bogle: ... And without any success whatsoever--if we're in traditional index funds, a return of around 8% in the past 10 years, and for the ETF, we have a return of about 4.5%, less than that, close to 4%.

Benz: This is dollar-weighted returns based on investors' timing?

Bogle: Dollar-weighted returns. Right out of their annual reports. It's a little bit crude, but it works.