“Don’t mess with John Bogle!”
That was the message that came through loud and clear from the comments on an article about exchange-traded fund (ETF) investing I wrote a few years ago.
I had incurred the wrath of the “Bogleheads.”
“Bogleheads” are an online community of investors who rush to the defense of The Vanguard Group’s octogenarian founder the moment anyone questions his wisdom.
What was my sin?
I had suggested that investors look at alternatives to the traditional market-cap-weighted index funds.
Specifically, I recommended that investors look at some ETFs based on non-market-cap-weighted indexes, which boasted longer-term track records of outperforming traditional index funds.
Fast-forward to 2018, and I feel thoroughly vindicated.
Since then, Vanguard itself has embraced ETFs – and the wide range of non-market-cap-weighted indexes on which they’re based.
Vanguard has become the market leader in the global ETF revolution.
Here’s how this happened…
Founded by John Bogle in 1975, Vanguard has grown into the world’s second-largest money manager.
In 1976, Bogle launched the first index mutual fund available to the general public.
In a 2005 speech, Nobel Prize-winning economist Paul Samuelson compared the launch of the index fund to “the invention of the wheel, the alphabet, Gutenberg printing.”
You’d have to look far and wide for higher words of praise.
Bogle left Vanguard in the 1990s. Since then, the direction of the Vanguard supertanker has shifted.
Most notably, Vanguard began to offer ETFs to complement its suite of traditional index funds.
Today, Vanguard has $5 trillion in assets under management. It is the largest U.S. mutual fund and ETF provider by assets.
Vanguard’s secret sauce?
Vanguard funds charge fees of 0.12% on average. That compares with an industry average of 0.62%.
By offering the lowest-cost products in the industry, it’s hoovered up assets like no other money manager.
Vanguard is now looking to cement its market leadership in ETFs.
Starting in August, investors using Vanguard’s online brokerage platform will be able to trade almost all U.S. ETFs for free.
The list includes more than 1,800 ETFs provided by 100 ETF providers, including iShares, Charles Schwab and State Street Global Advisors.
No other broker comes close to matching Vanguard in this respect.
By offering free ETF trading, Vanguard has solidified its position at the forefront of the ETF revolution. (Although Vanguard excludes free trading of leveraged or inverse ETFs because “their speculative nature runs counter to our investors’ focus on long-term success.”)
Why Bogleheads Aren’t Happy
John Bogle does not approve of the shift in Vanguard’s direction.
Since retiring, he has repeatedly criticized Vanguard for launching more ETFs than he thinks are necessary.
To this day, Bogle believes traditional index funds are better than ETFs for one reason: ETFs encourage bad “market timing” behavior.
Because of their liquidity, ETFs become a trading vehicle and cause higher turnover in the markets.
This lies in stark contrast to the old index funds, which trade only at the end of the day.
Why Bogle Is Wrong… and Vanguard Is Right
First, by limiting its offerings to index funds, Vanguard would be shooting itself in the foot.
If Vanguard didn’t offer ETFs, its competitors would.
Second, by becoming a leader in the ETF space, Vanguard is driving fees down for all investors. (And lower fees may turn out to be the most important part of John Bogle’s legacy.)
Third, inverse and leveraged ETFs help protect investors’ assets and maximize returns.
Market conditions change. There are times when it makes sense for you to make leveraged bets. There are times when you need to steel your portfolio against the ravages of a bear market.
Judicious investment in leveraged and inverse ETFs allows you to profit from these shifts in market conditions.
Ignore the Bogleheads…
And embrace the low-fee, flexible and Vanguard-led ETF revolution.
Your portfolio will thank you for it.