Vanguard Founder Bogle Tempers Criticism of ETFs

ETF Trends

Vanguard Group founder John Bogle isn’t known for pulling punches, especially when he’s looking out for the best interests of individual investors.

When Vanguard made its entry into the ETF business several years ago, Bogle made no secret of his opposition to the move. Because investors can buy and sell ETFs during the day, Bogle said they could encourage harmful speculation and investors losing focus on the long term.

However, Vanguard has become the third largest exchange traded fund provider. As if to answer Bogle’s criticism of ETFs, Vanguard recently released a study showing investors in its ETFs have not become day traders.

Bogle has argued that ETFs are “just great big gambling, speculative, instruments that have definitely destabilized the market” and compared the investment tool to “giving an arsonist a match.”

In more recent years, though, Bogle has shifted his position, saying that ETFs providing core exposure are fine if used properly for specific purposes; however, he remains wary about niche ETF products that are used “to speculate, rather than invest,” reports Jeff Sommer for the New York Times. [Why Vanguard Founder Bogle Doesn’t Like ETFs]

“There’s no question that ETFs are the greatest trading innovation of the 21st century,” Bogle said earlier this year. “But the question is, ‘Are they the greatest investment innovation?’ and the answer is ‘no.’”

Some ETF industry observers theorized that the ease at which ETFs can be traded throughout the day would do more harm than good as an investor’s trading costs would pile on and, in aggregate, lower investment returns. However, Vanguard recently came out with a research paper that argues against the harm. [Are ETFs Turning Investors Into Day Traders?]

“We conclude that it is not valid to assume that the so-called ETF temptation effect explains the higher-observed trading in ETFs relative to mutual funds, nor is it a reason for long-term individual investors to avoid using appropriate ETF investments as part of a diversified investment portfolio,” according to a Vanguard research paper. [Vanguard Study Finds ETFs Don’t Influence Trading Behavior]

“We found that, contrary to speculations in the popular media, most investments are held in a prudent, buy-and-hold manner, regardless of share class,” the research reveals, pointing to the fact that “investors who are inclined to trade choose ETFs, not that investors who choose ETFs are induced to trade.”

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Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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