Vanguard founder says aggregate bond indexes have too many Treasurys.
Vanguard founder John Bogle is, without question, the conscience of American capitalism. He no longer runs Vanguard, but he has a lot to say about a great many things given his 60-plus years in the mutual fund business, during which he launched the world’s first retail index fund.
During a recent conversation with IndexUniverse Managing Editor Olly Ludwig, Bogle held forth on a number of subjects, including his ongoing suspicions that ETFs tempt investors into making decisions that hurt them in the long haul, and his view that aggregate bond indexes have too much Treasury debt and not enough corporate credits.
IndexUniverse: There’s an increasing amount of focus now on market structure, electronic trading and glitches. Think of the disruption at the Nasdaq on Aug. 22. Do you have any general thoughts about these problems?
Bogle: In the world of technology, there are an infinite number of things that can go wrong. Everything has to work together and work correctly; all the different sources of information have to function in a coordinated way. And when that does not happen, the market’s going to fall apart. Back in 1987, that was just the beginning, and then we had the “flash crash” in 2010; we can expect more of that.
I would say not to worry about it, and don’t act on it; it will correct itself quite immediately. So if you're investing for the long run, it’s not even a hiccup. It’s not history, or a footnote to history, or even a footnote to a footnote to history.
IU: Historically, you’ve been very critical of ETFs, saying many investors don’t use them responsibly. I'm wondering if your views are evolving at all.
Bogle: In Vanguard studies, we compared our ETF shareholders with the shareholders in the same traditional funds, which I have come to call “TIFs”—traditional index funds. Compared to TIFs, holders of ETFs had about a 20 percent reduction in long-term holdings and about a 100 percent increase in trading activity in ETFs. That means the number of long-term investors went from 95 to 75 percent, and the number of traders went from 5 to 25 percent; something like that.
So, ETFs build up the behavioral problem we know investors have—acting on hair-trigger reactions to what happens in the market. And in the long run, it counts for nothing. If you look at the long-term return on stocks, it’s about 9 percent—about 4½ percent of dividend yields and 4½ percent of earnings growth, very roughly. And the speculative yield, the change in PEs over that has accounted for basically zero percent of the market return. It goes way above the market return, then it goes way below. So it’s very clear that behavior is going to do more damage to investors than a lot of other things that go on in the marketplace.
I'd change none of this from what I said a decade, a decade and a half ago, and that is that the ETF is probably the greatest marketing innovation in the investment business in the 21st century so far, but it’s not at all clear it’s the greatest investment innovation. It doesn’t seem to be working very well for investors. They trade too much and they lose.