Live Chat! The Legacy Of Jack Bogle

January 17, 2019

[Editor's note: Live! with Managing Director Dave Nadig happens weekly at 3:00 p.m. ET.]


Dave Nadig: Good afternoon, and welcome to the Live session: Jack Bogle memorial edition.
You can ask questions below, and I'll get to as many as I can in the next half hour or so.
We'll have a transcript up shortly after we're done. With that, let's get started!


SM: Most people are familiar with ETF benefits. In your opinion, what are some of the biggest risks/problems associated with ETFs?
Dave Nadig: Excellent question. I think the biggest "problem" with ETFs in 2019 is just the sheer variety. There are SO MANY ETFs to pick from.
While most of them have a reason for being -- they're right for someone -- obviously there are a lot of ETFs that just aren't right for some people, and it can be real work to tease that out.
I mean, just consider SPY ( -- it has over 160 competitors!
160 funds playing in the large-cap U.S. equity playground.
Now, there are some VERY cool funds in there, but there are also a lot of funds that have very specific use cases that aren't going to provide the same kind of returns as just boring old indexed large-cap equities.
So I think the biggest issues are simply due diligence and choice. Hopefully helps there, but it's also a big reason some investors have turned to automated investment platforms (Betterment, Wealthfront and so on) or model portfolios.


Zeke: Had you met Jack Bogle?
Dave Nadig: Hi Zeke (and I'll roll a few Bogle-related questions in to this one):

Anon: So in light of Bogle passing: Was his obsession with low-cost investing always an endless good? Is there such a thing as too low, or maybe too low to care?
Richard Martin: Was there ever a bigger luminary in this industry than Jack Bogle?
Dave Nadig: So, short answer, I had met Mr. Bogle several times, but only really had one big long chat with him. I wrote about it briefly today:
I saw a thread on Twitter recently about "who's our next Bogle?" in financial services.
And honestly, i really don't think we'll ever see one.
Not because he was a saint (despite his nickname) but because his solution -- a mutually owned company dedicated to simplicity -- is something I have a very hard time imagining happening again in my lifetime.
And it's worth pointing out -- he was pretty controversial, and not just with Vanguard's competitors.
He was not actually a big supporter of ETFs. He thought they encouraged people to trade, and really spent a lot of the end of his life being a thorn in the side of the industry -- including at Vanguard!
But that was Bogle -- never playing on anyone else's terms.


Elizabeth: Between the government shutdown and the Brexit vote failing, is there something I should be doing to my portfolio? Should I actively be trying to change positions at this time or should I just mimic "Saint Jack" and be boring and forget it?
Dave Nadig: Boy, that's tricky. I mean, the default answer is that anything you do in RESPONSE to a big externality implies that you are faster/smarter than the market.
Consider the market moves originally around Brexit. If you, say, sold all your U.K. positions or shorted the pound or whatever three days after the vote, you were betting that everyone ELSE who was changing their positions had somehow done it wrong.
Because if you're a seller, you believe it's going lower, and that the price you get today is somehow "wrong" and should be lower.
That's part of the core message from Bogle's legacy: You have to actually believe the market is wrong to be a price-setter.
Of course, MOST of the market is out there being price setters.


TraderJoe: I saw your webinar (part of it) on the new Direxion 150/50 ETFs. Who are these things for? What do you really think of them, now that you're not on the webinar with them?
Dave Nadig: Good segue question!
So, the funds we talked about we also wrote up here:
I think the funds are "clever" in that they take something investors have long done -- pairs trading -- and bake them into convenient packages.
I think there's something in putting a product on the street that is a real "money where your mouth is" tool.
For instance -- if you're an advisor who genuinely believes, for example, that small-caps are what pull the market out of the slump, these are a REALLY interesting way of making that bet.
Sure, you could just buy the iShares Russell 2000 ETF (, but these let you do that AND bet on the spread between small-caps and large-caps.
All in a beta 1 package that's not outrageoulsy expensive (around 50 bps or less for most of them).
Would I like them more at half the price? Grin. Sure.
But I think they're actually useful innovations.


Tangent Style: Do you think there's any risk to the ETF wrapper tax advantage vs. mutual fund? And is there any chance we see material ETF penetration of taxable retirement vehicles?
Dave Nadig: There's always a bit of a risk that one day, the IRS or someone else in the government wakes up and decides that in-kinding securities should be a taxable event.
There are HUGE implications for this, however, that go far beyond the ETF industry.
There's a great piece on the history of this:
It actually goes back to a 1935 court decision.
So it's not just a loophole -- it's actually part of how a lot of economic activity gets done, and taxed (or not taxed).
So in short: not something I lose much sleep over.
As for the issue of penetration into 401(k)s, seems unlikely to be a barn burner. While the technical issues (things like fractional shares for low-dollar, frequent contributions) can and have been solved, mutual funds are actually a nearly purpose-built product for 401(k) investors.
And frankly, most ETFs are too cheap -- there's no room in the expense ratios to pay for recordkeeping services. That means any pure, cheap, ETF-centric 401(k) plan would have to have explicit charges, which, while I would applaud, goes against the current grain of the K-plan sales ecosystem!


Julio: What are the risks of these "defined outcome" ETFs? UOCT, BOCT ...
Dave Nadig: Boy, these products keep coming up; so, clearly they're onto something!
At the core, these products just cap your upside, and use that to buffer some of your downside risk.
I don't think there are any weird or unpredictable blow-up risks or anything. The products are well-designed (in my opinion) and do what they say on the tin.
The biggest issue is that they're pretty complex, and a bit tricky to explain.
I think they're real, useful innovations, and I think for a lot of investors -- and advisors in particular -- they can be a real value-add.
So I think it's WORTH doing the learning, but there is learning to be done.
I'd start at their site:
And if you get lost, well, maybe they're not for you.


Reed T.: It’s obvious the shutdown is detrimental in myriad ways. Is there even one positive thing about it that the layperson is missing?
Dave Nadig: From an investor's perspective? Not that I can see. Pretty much every angle I can come up with is net-negative for the economy, for your portfolio, for individual companies and for sure for anyone directly impacted.
I know some government contractors who not only aren't getting paid, their contracts are suspended -- they won't get backpay or anything.
Whether there's political hay being made on either side is not really my lane. But I can't see a "good" in this at all.


Anonymous: How was it that some "hacker" was able to fool such media outlets as the Financial Times with a fake letter from BlackRock? Has this kind of thing happened before?
Dave Nadig: I am actually VERY surprised this doesn't happen more often.
It's shockingly easy to send press releases out saying whatever you feel like saying. It's also shockingly easy to do things like spoof where an email looks like its coming from.
And heck, we saw the fake, physical copies of the Washington Post -- that's easy too.
What's harder is to do these things in a way that leaves no trace.
So sure, I think spoofing something like an earnings announcement could catch a LOT of people off guard, in this world of social media, stocktwits and so on.
But it's objectively a crime. So the question is if people think they can get away with it.
OK, going to close early with one or two from a very prolific questioner here (grin).


Tangent Style: What do you think is the most important data source/data vendor in the ETF ecosystem?
Dave Nadig: Well, I'd love to say, but genuinely, I think there are three (from an investor's perspective) that matter, and they all have strengths and weaknesses.
I'm a bit biased, but I think FactSet has the best core data set and analytics (I'm biased because I helped build it, and sell it to FactSet, and it's still 90% of the data we use here at
So that to me is the baseline.
Bloomberg is unquestionably the "most important" from an ecosystem perspective, however.
You would never in a million years launch an ETF without being extremely sure BB had all your data correct. They drive so much of the institutional market ... not just trading either.
they've got their fingers in everything, from creation/redemption baskets to commody analysis.
And last, I'd have to say Markit, primarily because it's the biggest provider of clean, pre-market portfolio composition files to the authorized participant community.
That's a huge, invisible piece of plumbing that keeps everything running.
Last question here:


Tangent Style: Seems like we experienced a particularly intense MF to ETF rotation in this past Q4. Do you think that has any unique (first down year to see what happens) legs into the new year?
Dave Nadig: 2018 went pretty much according to plan. That is, everyone keeps asking the question, "What happens when we have a pullback?"
There was a lot of "well, active management will win in a downturn, and we'll see big reversals of flows back into active MFs, and out of passive ETFs"
I (and many others) kept trying to remind folks that the opposite has happened in every downturn since the mind 1990s.
When markets sour, people ditch their underperforming overcharging benchmark-hugging active managers and just go for cheap market exposure.
And that's EXACTLY what happened in the 4th quarter of 2018.
If 2019 is trendless and volatile (which is sort of looking like the baseline scenario to me), I would expect this to be a pretty "normal" flows year: Call it $300-400 billion into ETFs, and $100-200B billion out of mutual funds.
OK, and with that sure-to-be-wrong prediction, I'll wrap it up.


Thanks for joining; we should be same time/same place next week.

Have a great afternoon!

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