Vanguard Group founder John Bogle is also considered the father of index funds. He’s long held a dim view of exchange-traded funds (ETFs) and recently dubbed them great for marketers and bad for investors.
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He says ETFs have become a marketing and promotional game. But he has set parameters for using them since the investment vehicles are experiencing phenomenal growth in the marketplace.
Popularity of ETFs has soared. They are low-cost, tax-efficient, and a prudent diversification tool. Like stocks and bonds, they can be traded throughout the day on an exchange. Index funds are more aligned with Bogle’s buy-and-hold approach.
He says ETFs lend themselves to speculation in the marketplace. Everyone’s creating them and competition is heavy, making the credit quality of many ETFs questionable since they make good use of leverage.
People are creating their own investment ideas and their own indexes. That has led to the speculation Bogle speaks of.
Exotic ETFs have sprung up to enable investors to participate in extremely narrow market niches. New funds are being created every day, making the sheer numbers of ETFs a concerning factor.
Bogle’s guidelines mandate use of ETFs as investments, not as instruments for speculation. He says advisors should use caution in selection and only use broad-market based ETFs. Investors should avoid ETFs that are overleveraged.
He says investors can gain the same cost and tax advantages by using index funds. He advises owners of Vanguard ETFs to buy them and hold them. He says less than 10% of individual investors buy ETFs to hold for the long term.
Bogle says that, over his long career, anytime he did something for marketing reasons, it usually turned out to be a mistake. He says Vanguard ETFs
were created in sounder fashion than others and that there’s no reason a Vanguard S&P 500 ETF, for example, would not be around long term.