Bogle Critical of Latest Indexing Trends

June 20, 2004

Index Investing pioneer John Bogle laments the speculative shift of index products & says the trend is harmful to investors

Indexing may be a good idea that's going awry, says John Bogle.

Bogle, the man who brought the retail index fund to the masses, says the original philosophy of buying broad swaths of the market and holding them "forever" is being tainted by a parade of new specialty index funds and ETFs.

In a recent speech at Washington State University, Bogle bemoaned the fact that most index funds track narrow market segments, instead of broad market yardsticks like the S&P 500 and Wilshire 5000.  Bogle found that only 109 of the 333 existing index funds track broad stock indexes.  The rest are linked to narrow market indexes: small cap-growth stocks, technology stocks, single country stocks - "funds that seem to be bought to be sold," said Bogle.

Mr. Bogle is also wary of the latest big innovation in indexing - the exchange-traded fund.

"The problem with ETFs is that they're widely used for short-term speculation rather than as long-term investments," Bogle said in an interview.  "I've seen surveys that claim that a majority of ETF investors are long-term investors, because they hold the fund between six months and one year.  However, that doesn't fit my description of a 'long-term' investor, by any stretch."

Although there are several broad-based stock ETFs, many of the offerings track narrow market segments.  Vanguard, despite Bogle's public apprehensions before the fact, recently took the plunge and significantly expanded its ETF lineup.  And in a move many observers considered a radical break from Vanguard's roots, the Valley Forge-based firm rolled out a family of equity sector funds and matching Vipers ETF share classes.

Although Bogle stepped down as Vanguard CEO in 1996, he is anything but retired.  The admitted workaholic heads up the Bogle Financial Markets Research Center which is located in the Vanguard offices, and is still viewed as the fund investor's best advocate.  He is frequently found in front of a microphone or camera expounding the virtues of low-cost index investing.

Bogle Hasn't Moved Into ETFs

Although he thinks ETFs are cleverly designed products, he fears they may end up only helping investors hurt themselves.

"I'm not negative on ETFs, but rather on how they are sometimes marketed as trading instruments," said Bogle.  "For example, I just don't see how investors will benefit from the ability to trade indexes throughout the day in real time."

Bogle says he hasn't switched any of his money from Vanguard index funds into ETFs.  Bogle is in Vanguard's Admiral Shares, which have lower expense ratios than investor shares, and are for investors who have at least $250,000 to invest.  For example, Admiral Shares in Vanguard's S&P 500 index fund have an expense ratio of 0.12%, while investor shares are pegged at 0.18%.

Vanguard's large-cap Vipers ETFs tied to a new MSCI index have an expense ratio of 0.12%.  (S&P won a lawsuit against Vanguard effectively blocking the launch of Vanguard S&P 500 ETFs.)

"I'm in Vanguard's Admiral Share class, and the costs are the same - although of course I don't pay commissions," said Bogle.

"I haven't moved any of my money, which is heavily indexed in broad market funds like the S&P 500 and the total stock market [Wilshire 5000], over into Vanguard's ETFs.  I have no interest in trading them, and I'm absolutely convinced that if I did trade them I would lose money," Bogle said.

If the daily volume in some of the largest ETFs are any indication, most investors are trading them at a ferocious rate.

"Each day, about $8 billion of Spiders (ticker: SPY) and Qubes (ticker: QQQ) change hands, an annualized portfolio turnover rate of 3000%, representing an average holding period of just 12 days," Bogle told the audience during his Washington State address.

Bogle, the protector of the individual investor, says he cringes when he hears ETFs marketed as tools for trading popular indexes like the S&P 500 all day long.

"We trade based on our emotions, but we invest based on economic reality," said the pragmatic Bogle.  "Anything that encourages us to let our emotions take over is going to hurt long-term returns.  Emotions have destroyed far more investment programs than economics."


John Spence is editor of Check out his musings on the ETF industry each Monday at If you have ETF story ideas, contact him at [email protected]. Also contact him if you have an article submission for The Journal of Indexes -- or if you're a financial reporter wishing to interview Steven Schoenfeld on his upcoming book Active Index Investing.

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