Vanguard founder Jack Bogle is an icon, but he needs to refine his rant…

I can’t say enough good things about Jack Bogle, who has been THE paragon for prudent and sound investing for the last four decades.  He has, to my knowledge, been completely consistent in speaking out about the negative impact of speculation in the investment industry and the importance of lowering investment costs in the quest for higher portfolio values.  Yet he has been on a rant against exchange traded funds for a while now, and while I agree with some of it, he’s starting to make comments that are way off base.

In a recent public gathering of well-known portfolio managers sponsored by Bloomberg, Bogle criticized ETFs as “the best trading innovation of the 21st century” while castigating the entire class of securities as harmful to long term investors because they encourage frequent trading and because there are too many lousy choices on the market.

I fervently support his philosophy against frequent trading and agree wholeheartedly that there are far more lousy ETFs on the market than good ones.  Having said that, I will argue as loudly has he argues his points that ETFs are empirically a better investment vehicle than any other and should be an investor’s first choice when getting exposure to most markets.  In fact, I challenge him or any other to show me one way that the ETF structure is inferior to the beloved mutual fund.  It can’t be done.

ETFs offer more transparency, more liquidity, more tradeability (can be a double-edged sword, but all in all is an advantage for prudent investors), more tax-efficiency, and more flexibility for the same or less expense than one can get through mutual funds.  It’s empirical and unequivocal and frankly, isn’t worth even arguing about although I’m happy to any time!

But Mr. Bogle is harping so loudly about how ETFs can be and often are misused by the investment industry and the public that I am concerned he is steering many in the wrong direction instead of objectively educating them on how to use ETFs correctly.  Yes, if used ignorantly ETFs enable many to speculate in ways they couldn’t before, and in a rush to gather assets the industry is pumping out incredibly ridiculous products that appeal to whatever the trend of the day is.  But the cliche “guns don’t kill people, people kill people” always comes to mind as the proper retort when he starts talking about all the ways one can misuse an otherwise smart and efficient structure.  We should not broadly denounce ETFs any more than we should denounce firearms.  Yes, the ETF stockpile has its own form of fully automatic weapons that have no logical use for rationally-intended investors, but we shouldn’t throw the baby out with the bathwater.  Just like with firearms, we should preach and teach safe-handling and their merits while educating about how to avoid misuse and the consequences thereof.

After a long career in the investment industry, I have first hand experience in all the ways the industry fleeces investors and how misguided the vast majority of both professional and non-professional investors are and can be when putting money to work in the public markets.  But I am as big an advocate of ETFs as there is because they are, to date, the smartest way for anyone to access the markets when looking to do so in a diversified, transparent, and low-cost way (which, incidentally, is how we should all be looking to get market access).

I will not deny, however, that investing in ETFs is like investing in anything and requires knowledge and perspective to avoid making costly mistakes.  The industry is constantly working against investors by adding complexity and creating impediments to lower costs as best it can, and investors have to remain vigilant while understanding how the game is played.  The investment industry is NOT on the side of investors, no matter how much money it spends on marketing messages that say otherwise, but that doesn’t mean investors can’t find a tool or two that gives them at least a fair chance at achieving their objectives.

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