John Bogle

Bogle Cautions Indexers on ETF Speculation

John Bogle

Vanguard's founder denounced the speculative appeal of exchange traded funds before the largest annual US gathering of indexing faithful, who took the message to heart but felt that it understated how speculative interest benefits the long-term investor.

"We are witnessing the triumph of indexing," said John Bogle, who is credited with creating the first index mutual fund, the Vanguard S&P 500 Fund, in 1976. "But beneath this triumph lies disquieting developments. Incredibly, indexing is being used not to match the market but to beat it."

"ETFs are brilliantly designed products," he admitted on the 30th anniversary of index funds at the Super Bowl of Indexing in Phoenix on December 2. "They will serve investors well if they buy and hold them for the long-term."

The problem is that far too many investors, including individuals, use them as speculative tools. He cited 2001 turnover rates of 3,250% for Nasdaq QQQs and 1,380% for the S&P SPDRs. "I cannot imagine investors engaging in such speculation can be profiting after trading costs are taken into account," he said.

Attendees agreed that speculation is dangerous for the individual investor but felt that Bogle missed the symbiotic relationship between speculative and conservative ETF investors. Individual investors are not all naive and undisciplined, attendees noted, and certainly pension fund managers follow strict guidelines. Others pointed out that institutional investors use the products for conservative hedging strategies, such as to invest cash quickly or to make sector bets cheaply. But most importantly, speculators such as hedge funds and day traders play their part by benefitting the buy-and-hold crowd with better liquidity. Popular ETFs have achieved impressively small bid-ask spreads.

The need to educate investors of all stripes on ETF benefits and dangers was underlined by the New York Stock Exchange's Group Executive Vice President, Catherine Kinney. She called on ETF makers to spend more time educating the investing public on this popular tool.