Jack Bogle vs. index funds
Well, some index funds.

In an op-ed in the Wall Street Journal today, Vanguard founder Jack Bogle tees off on exchange traded funds. (The link is subscriber-only, but a PDF of the story is available here.) ETFs, if you need a refresher, are funds that simply track some index of stocks or other securities. Since they don't have a manager actively buying and selling stocks, they can be cheap. Unlike regular mutual funds, ETFs can be traded instantly on the stock exchange, and you can even sell them short or buy them on margin.

And in past few years, they've been spreading like wildfire. Or, to use a simile Bogle would probably prefer, like a rash.

Bogle created the first index mutual fund, so his essay is sort of a Frankenstein's lament. He's clearly peeved about the new ETFs that follow a fundamental indexing strategy--which isn't surprising, since the whole idea behind such funds is that Bogle's straightforward, buy-the-whole-market approach is subtly flawed. He also thinks that the many hyperspecialized ETFs that have come on the market--like the "HealthShares Emerging Cancer" ETF--completely miss the point of indexing, which is that most investors should give up on the idea that they can outsmart the market.

Bogle points out that of 690 ETFs that exist today, only 12 track broad market indexes. In a way, that's just proof of how well ETFs can work: Once one company creates an ETF that effectively tracks a given index, there's really no need for anyone to start another one. So Wall Street firms that want to tap into the ETF fad soon have to start building index funds to track Bangladeshi butter futures or whatever. I'll say this much for ETFs: They've made it even more obvious that most actively managed mutual funds, and especially sector funds, are overpriced.

At Money, we keep hearing that ETFs are soon going to play a bigger role in 401(k) plans. Watch out. The ETFs that make the most sense--the ones that track broad indexes--aren't really an improvement over classic index mutual funds if you are going to be a buy-and-hold investor putting a little bit of money in at a time. And most of the ETFs that really differ from what you can get in regular funds just make investing more complicated than it needs to be for most people. If we learned anything after the crash of the 2000s, it's that having lots of options in 401(k) plans didn't help and probably hurt.
Posted by Pat Regnier 7:11 PM 1 Comments comment | Add a Comment

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.