Bogle attacks ETFs (again)
Posted on February 13, 2007 by Richard Beddard
Filed Under Investing |
The father of the index fund, John Bogle, struck another blow in the war of the trackers in the Wall Street Journal last Friday. He says Exchange traded funds (ETFs) that track increasingly specialised markets serve none of the original aims of index tracking. Far from being diversified, he says:
Can you believe that we now have a “HealthShares Emerging Cancer” ETF?
He admits ETFs may be superior to old style index-trackers:
ETFs, simply put, are index funds that can be traded in the financial markets. In fairness, if they are not traded, they can often be the equal of the classic index funds. If they operate at lower expense ratios and provide potentially higher tax efficiency, they may provide the same diversification at even lower costs (provided that the initial brokerage commissions are amortized over a substantial span of years).
But when investors trade them for the short-term, it amounts to a bonanza for stockbrokers and market makers through commissions and bid-offer spreads.
Being a bottom-up investor, preferring to pick the companies I invest in, I’m just enjoying the scrap. The proliferation of new ETF’s in hot sectors is something to be wary of, but it would seem that whether you see the evolution of the ETF as a good thing or a bad thing depends on that age old conundrum; Can you beat the market?
If you think you can, then higher costs are the price you pay for the opportunity to prove it with ETFs.
If you don’t you’re a Boglehead.
More on fundamental ETFs:
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[...] just about investing, is a good read. Yesterday he wrote a defense of ETF’s in response to a letter from John Bogle he’d read about here on the Interactive Investor blog. That’s the kind of knockabout [...]
The largest challenge with etf’s is commission fees, thanks to large banks like Wells Fargo and B of A offering at least 100 free trades per account each year, that problem is whisked away and we are left with the least expense broad market etf’s available to even the smallest investor at only a .07% expense/year and no upfront costs. For buy-and-hold investors, this is a great time in the financial history of this country………….finally the little guy has all the tools he needs to be a successful and passive investor with the most minimal amount of effort, knowledge and cost. I hope Mr. Bogle and others will learn to reopen there arms to etf’s as a proper investment vehicle in the new revolution of the financial industry. There will always be traders giving their money away at lightning speed……but with time there will be more and more long-term investors holding broad market etf’s for 10+ years and using all there free time enjoying life.