Jack Bogle Advises to Cut it Out With ETFs

Jack Bogle made his career as founder and leader of the Vanguard Group. Now retired, the investment giant nonetheless still holds major sway in the financial world, and investors of all types look to him for indications of market trends and investment decisions. In a recent article written for Financial Times, Bogle discussed the rise in prominence of exchange traded index funds (ETFs), cautioning investors to be careful not to blindly follow the trend and the hype.

ETFs are Getting a Lot of Attention, But There are Other Options Too

Bogle begins his essay by explaining that ETFs have been widespread in financial headlines in recent months. They are a trendy investment area at the time. However, traditional index funds (what Bogle calls TIFs) have not enjoyed the same appeal. Bogle points out that that his Vanguard 500 Index Fund began as the First Index Investment Trust and was likely the first TIF, founded back in 1976. Though it had a poor IPO, it signaled a new period of investment areas focusing on the stock market and long term strategies.

ETFs began in 1993, according to Bogle, with the primary difference between the first ETF and Vanguard's 500 Index Fund being that ETF investors could trade the fund frequently. Bogle argues that because higher trading volume typically leads to lower return levels, he opted to remain outside of the ETF world.

Success for Both Strategies

In the decades since those early funds, Bogle acknowledges that both ETF and TIF strategies have been successful. They constitute today a major portion of investment assets for people around the country. Still, Bogle points out that TIFs have grown faster than ETFs since the 2008 financial crisis, although they have been much less likely to make headlines With 80% of TIFs represented by broadly diverse funds, only 43% of ETFs are. Bogle points to this and a number of other reasons why investors may be cautious about ETFs. ETFs, he says, have had to be in competition with one another based on the prices they charge to investors. Strategic beta ETFs and concentrated ETFs, which represent a wider portion of all ETFs as compared with similar strategies for TIFs, have much higher annual expense ratios than their competitors.

There is no doubt that many investors stick by ETFs as a solid investment strategy. In many cases, they pay off well for their investors. But Bogle sees them as adding unnecessary complication to the investment process, when TIFs are comparably reliable as a type of investment strategy and also do not offer the same types of risk. Will Bogle's advice impact ETF interest? Perhaps on an individual level, but the ascendance of ETFs seems guaranteed.