The encomiums are pouring in for Jack Bogle, who launched the first index funds and sang their praises for decades. But what’s less known about Bogle, who died Wednesday, was that he loathed index funds’ progeny, exchange-traded funds.
Like index mutual funds, ETFs are low-cost and mostly follow the S&P 500 and other such indexes. To Bogle, who founded Vanguard Investments and powered it to prominence on index funds, ETFs are nasty creatures. Because they can be bought and sold like a stock (unlike mutual funds, which all settle at the end of the day), ETFs are used for fast trading by Wall Street sharpies, who often short them to hedge their positions.
Result: Their prices jump around too much, which as a true believer in stable, buy-and-hold investing, Bogle found troublesome. In an interview last fall with Morningstar’s director of personal finance, Christine Benz, he lamented that the S&P 500 SPDR and kindred ETFs “turn over, I think, 5,000% a year.”
“Is there anything the matter with that?” he asked. The rapid trading, he said, doesn’t have “any social good.”
Bogle liked the reliability of index funds, where risk is relatively lessened because you own the market as a whole, as opposed to taking a chance on an active manager who may bomb out. Active fund managers charge too much money, he famously contended. ETFs are just as low-cost as their index fund relatives, but he was dismayed at the increasing use of them—and when Vanguard started offering them after his retirement, he was enraged.
A few years ago at a conference of his devotees, known as Bogleheads, he said that “ETFs are like the famous Purdey shotgun. Great for killing big game in Africa and great for suicide.”
He loved to disparage the new, and frankly offbeat, indexes that have been invented to issue ETFs. “We have a vegan ETF,” he marveled. And he especially denigrated “reverse leverage” ETFs, where investors are betting against the market and magnifying their gambles with high debt. For him, this practice was a recipe for disaster.
“Trading,” he told Morningstar, “is the investor’s enemy.”