AI Summary
Jack Bogle, founder of Vanguard, discusses his nuanced view on ETFs. He clarifies that he has no issue with broad market ETFs like the Vanguard S&P 500, but criticizes narrow, managed ETFs and the misuse of broad ETFs for short-term trading.
Index funds represent 28% of the market, with ETFs accounting for more than half of that.
Bogle's concern is not with broad ETFs per se, but with narrow, managed ETFs and the misuse of broad ones for short-term trading.
Bogle created the acronym TIF (Traditional Index Funds) to distinguish them from ETFs. Both can own identical portfolios with similar costs, so he has no preference.
Bogle's bias against ETFs stems from the temptation to trade during market volatility, which can lead to poor decisions.
Bogle approves of broad market index funds including total stock market, S&P 500, total bond market, and emerging market funds.
Bogle criticizes niche ETFs like 'Emerging Cancer ETF' and 'Cloud Computing ETF' as marketing gimmicks rather than sound investments.
Bogle dismisses leveraged ETFs (2x, 3x) as gambling, questioning their logic.
Bogle's main concern with ETFs is the behavioral risk of intraday trading and the proliferation of niche, speculative products. He advocates for broad market index funds held long-term.
Full Transcript
[00:00] The dominance of index funds, I believe at 28% of the market, is partly due to ETFs, which are more than half of that. But I gather it's not that you have something against broad ETFs per se.
[00:14] You have something against the narrow ones, the managed ones, and the way people are misusing the broad ones. Is that it? That is exactly it. And let me just give it to you a little more specifically. You know, first, to be crystal clear on this, I couldn't care less if an investor decides
[00:32] to go into the Vanguard S&P 500 ETF or into the Vanguard. I had to create a word for this, an acronym to go with ETF, TIF, Traditional Index Funds.
[00:44] They both own exactly the same portfolio. They're both part of the same portfolio. Their returns will be identical. They both go for around five or six basis points at the Admiral class level. We had many, many years ago when I was running this place, I perceived a little bit about
[00:58] the future and we put on a pricing thing where you got higher returns as your average investment rose And I think now the Admiral threshold is maybe So if you down below 10 you probably paying 10 or 12 basis points So
[01:12] once you get to 10,000, and they will be identical. So I couldn't care less. If I have a little bias against the ETF, it's because you may say and believe that when trouble comes, you
[01:29] will not get out in the middle of the day. The middle of the day. I mean, come on. And it won't be the point of that at all. But as long as you avoid that temptation. Because then you can sleep that night. That's the reason people get out in the middle of
[01:44] the day. Oh, wait a minute, though. The market went down 300 points in the middle of the day. You got out and it went up 300 points in the second half of the day. I mean, a lot of bouncing around. It's meaningless. But in the long run, in the long run, that's a nuance, a difference,
[01:57] No difference whatsoever. So fine, and fine for any broad market index fund in which I would include the total bond market with some limitations the total U stock market the S 500 international and even if you want to put a little chunk into emerging market funds all total market funds So the idea of investing with the fruits and nuts it just you know we had when these
[02:27] funds started, somebody brought out, I don't think this is much of a name, by the way, a fund called Emerging Cancer ETF.
[02:39] And first of all, it should have been curing emergency cancer or something. It sounded like they were hoping everybody would get emerging cancer. And I criticized that particularly in an article I wrote about ETFs in the Wall Street Journal.
[02:52] And the guy who started it wrote me, I thought, a kind of plaintive letter. And he said, look, I deserve the same chance to try my ideas as you deserve when you started the first index fund.
[03:06] Well, is there a difference between selling quality and selling junk in your first idea? So I guess I gave him a nice answer. Go for it, man. Emerging cancer is long gone But have things changed No Now we have a cloud computing ETF A cloud computing ETF
[03:25] It almost sounds like the way they're computing the ETF, but they're talking about, I suppose, corporations that are involved in cloud computing, which I would have said was every technology company in America, but I don't claim any expertise in that area.
[03:38] So there are these funny little... It's a great big marketing business. Think of something no one else has ever thought of and therefore at this level the crazy of the idea and the stupider the idea
[03:52] The less it is that other people have thought of it and then you get bet on the market I know that's not enough gambling for you So we'll bet on the market with 100% leverage. Yeah, that's not good enough
[04:05] 200% leverage No market there bet on the market with 300% leverage the market will go up three times and down three times or down you have your choice as your investment what sense that makes is beyond my comprehension