John Bogle: High Court Fell Short With Fees Ruling

April 08, 2010 What is your opinion regarding disclosure for ETFs and mutual funds?

Bogle: I’ve felt for a long time that mutual funds ought to report not only the returns the fund earns as such—what we call time-weighted returns, but also the returns actually earned by their shareholders—which are dollar-weighted returns or asset-weighted returns. The most recent data I looked at showed that ETFs that had comparable mutual funds—where you could buy a particular sector with either an ETF or a mutual fund—the time-weighted returns of the mutual fund and the ETF are pretty much the same, but the dollar-weighted returns were substantially different to the disadvantage of the ETF by as much as 3 or 4 percent a year. There’s much more opportunistic buying and selling going with on with ETFs because people think they can outguess the market, and that just can’t happen to investors as a group. Have ETFs been a net benefit or a net negative for the average investor?

Bogle: Definitely a net negative. If you look at investing as a lifetime affair, you want to invest in a broad market index fund or two in the stock market and the bond market and just hold them forever. But you get this trading mentality and it’s hard for me to imagine that at the end of an investment lifetime—we’re talking 50 years, probably 60 years now—that all this trading is going to do anything other than cost you a fortune. And ETFs are goading people into making that bad judgment, the way you see it?

Bogle: I think investors are basically trading these funds much too much. It’s hard for me to understand as an outsider how the Standard & Poor’s SPDR (NYSEArca: SPY) turns over 10,000 percent a year. Ten-thousand percent! The average stock is around 250 percent; the average mutual fund around 50 percent. That 10,000 percent is a staggering number. So they’re definitely used as trading vehicles, and I’m just very doubtful that that can pay off.


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