Bogle: Time For A Trading Tax

December 03, 2010

In an exclusive interview, Vanguard founder John Bogle examines ETFs, trading taxes, the ‘flash crash’ and whether we’re on the verge of a depression.


In an exclusive interview with Managing Editor Olivier Ludwig, Vanguard founder John Bogle examines ETFs, trading taxes, the flash crash and whether we’re on the verge of a depression.


Ludwig: How would you characterize the state of the battle to communicate the very basic message that costs matter perhaps more than anything else in investing?

Bogle: What makes me happy about the way the battle is going is that there is no question that the heaviest cash flows in the industry are going into the generally lower-cost funds.

Ludwig: Vanguard is doing a fine job putting the pressure on everybody, no?

Bogle: I think so. The iShares people say they're not going to get into any price cutting, although their shares are several times—three or four times—more expensive than ours, for example, on the emerging market ETFs. They say they're not going to cut prices because people don’t care about price, all they care about is service. Well, I can virtually guarantee you that a year from now Barclays will have cut their costs by 30 percent, at least.

Ludwig: What does service mean in this context?

Bogle: It means helping investment advisers understand ETFs, particularly the complex ones. But the beauty of ETFs, if there is a beauty, is in broad markets. You can buy broad swaths of large markets long term: a total stock market index, the S&P 500 or an emerging market index. The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk and you eliminate manager risk.

Ludwig: That's John Bogle 101.

Bogle: That's exactly right. And you hold them forever. But that's not the way the business is going.

Two things are interfering with that. One is that the vast majority of ETFs are not in those broad market categories. Out of around 800 ETFs, if you can find 30 in those broad market areas, you've probably done about as well as you can do.

At least 770 are in narrow areas of the market, so that's problem one. You're offering specialty products, taking on risks beyond those of the market. And these ETFs are basically encouraging you to take market sector risk. I should say it’s not working very well.

Ludwig: Most assets still are concentrated in the broad-based funds, though, right, The SPYs of the world?

Bogle: That's absolutely correct. But you have to take into account that the SPDRs are basically trading vehicles, mostly for institutional investors. They have turnover of 10,000 percent a year. The mutual fund industry turnover is outrageously high too: It’s 33 percent, and that's unacceptable. What do I think about 10,000 percent turnover? Enjoy the fund, boys.

Ludwig: What did you make of the flash crash on May 6? About 70 percent of all the securities with canceled trades that day were ETFs.

Bogle: People have to be very conscious of setting not only a price below which they want to sell, but also a price below which they will not sell. In other words, you might say, “I want to sell if it drops below 20, but I want to cancel that order if it drops below 15,” say, something like that, or even 19.


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