Vanguard founder John Bogle: Buy total market ETFs and avoid “marketing gimmicks”

Oct 4th, 2016 | By | Category: ETF and Index News

Investors should pick diversified total-market exchange-traded funds and hold them for the long term, rather than buying into “marketing gimmicks”, according to the founder of Vanguard, John Bogle, and former Chief Investment Officer, Gus Sauter.

Vanguard founder John Bogle: Buy and hold total market ETFs is preferred strategy

John Bogle, Founder of Vanguard.

At the annual “Bogleheads” meeting near Philadelphia, attendees reportedly agreed that ‘exotic’ ETFs are not as advisable as total market index funds.

ETF assets have grown to around $3tn worldwide. There is $2.42tn worth of investor capital invested in US-listed ETFs alone, up from $2.07tn at the start of the year, according to research firm FactSet.

The number of ETFs worldwide has grown exponentially in recent years. While there are many available that offer broad market exposures, similar to index funds that track mainstream equity markets like the FTSE 100 or S&P 500, the diversity of available exposures has widened to include asset classes like property, individual sectors, commodities and niche thematic exposures.

Vanguard has the largest mutual fund suite in the world by assets under management. The firm offers ETFs, index funds and actively managed mutual funds.

After the $197.2bn SPDR S&P 500 ETF Trust (NYSE ARCA: SPY) and the $79.5bn iShares Core S&P 500 ETF (NYSE ARCA: IVV), the third largest ETF in the world is the $64.5bn Vanguard Total Stock Market Index Fund ETF (NYSE ARCA: VTI), which costs just 0.05% per year.

The first index fund of US stocks was launched in the 1970s – it was a “complete flop”, Bogle said, with just $11.3m at launch. The same firm, Vanguard Group, just turned 40 years old last month – and now has over $3.6tn in AUM.

Bogle, who left Vanguard in the 1990s, has frequently encouraged higher ethical standards and called out some companies and investors for using ETFs for “less than noble purposes”.

He said he appreciated that ETF fees were generally low. But the increasing number of so-called “fringe ETFs” – funds that invest in obscure and niche corners of the market – are encouraging investors to bet on anything from Chinese tech companies to soybeans.

There are now about 1,900 different indices for thousands of ETFs, he added. He warned against active trading and advised investors to buy and hold a diversified, total market fund.

“There are plenty of perfectly good uses for ETFs, as long as you don’t trade them,” Bogle said.

Active trading involves incurring a bid/offer spread – the difference in price between buying and selling a security. The spread can be high on exotic, often more thinly traded ETFs. Added to this is the very real possibility the investor may mis-time the market, as well, of course, as brokerage commissions.

Passive total market investing has been highly beneficial to investors over the long term. VTI launched in 2001, and from 8 June 2001 to 4 October 2016 the fund is up more than 91%.

Gus Sauter, the former CIO who left Vanguard in 2012 after 25 years at the firm, agreed that exotic ETFs, such as short and leveraged ETFs, are “hazardous”, and that investing in these products “stretches” the concept of indexing. He also advocated for a total market strategy.

Sauter said: “People tend to swim in the wrong direction. So investors should be careful and ask themselves honestly, ‘Why do you think you know something nobody else knows?’”

He told in 2012 that his core philosophy was to “think long-term, establish a strategic plan and then stick with it”.

Bogle’s and Sauter’s views passive in investing are not shared by all in the investment community, however; their remarks comes shortly after a research note from Sanford C Bernstein declared that passive investing was worse than Marxism. The analysts said active management was essential to fuel companies and create social change, a claim that was hotly disputed by passive industry participants.

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