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Why Jack Bogle did not like ETFs

‘Wolf in sheep’s clothing’

Education corner / Advanced / Why Jack Bogle did not like ETFs

Jack Bogle's scepticism

The late Jack Bogle famously described ETFs as a “wolf in sheep’s clothing” despite their ballooning popularity among investors.

The Vanguard founder warned ETFs encourage investors to trade due to the intraday liquidity on offer, trade on exchange – which can lead to less transparency on costs – and lead issuers to create products linked to volatility or leverage.

The legendary figure, who created the first index fund in the mid-1970s, rejected the chance to launch the first ETF after Nathan Most – the inventor of the US ETF – first approached Vanguard before State Street.

“The late Nathan Most, a fine man, initially offered to partner with Vanguard, using our S&P 500 Index fund as the trading vehicle,” Bogle said. “Since I see trading as a loser’s game for investors and a winner’s game for brokers, I declined his offer. But we parted friends.”

The root of Bogle's concerns

This was the key driver behind Bogle’s scepticism of ETFs. Because ETFs are listed on an exchange, they can be traded throughout the day like a stock.

Bogle argued this encouraged short-term trading, with investors moving from one strategy to another rather than fostering a buy-and-hold mentality.  

Frequent trading, he argued, is detrimental to an investor’s returns over a long-term horizon and detracts from the theory that investors should hold the entire stock market instead of looking to find value in narrower regions, sectors or styles. 

“During the past decade, the principles of the traditional index fund have been challenged by a sort of wolf in sheep’s clothing, the exchange-traded fund,” he warned. “But let me be clear. There is nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you do not trade them.” 

Beyond traditional indexing: Risky strategies and Bogle's warnings

Furthermore, the ETF wrapper allows asset managers to launch a variety of risky strategies including thematic, leveraged and volatility, a prospect that frightened Bogle.

Through exchange-traded products (ETPs), investors can access these strategies with ease, however, as we have seen over the years, they can wipe out returns in an instant. 

“ETFs are like the famous Purdey shotgun. Great for big game in Africa and great for suicide,” Bogle once said disparagingly. “They are absolute speculation, and they have hurt a lot of people.” 

Buffett's endorsement

While this is a niche corner of the market, an increasing trend within ETFs is the growing number of active strategies from players such as abrdn and AXA Investment Managers.

The direction of travel would certainly frighten Bogle as the ETF industry moves away from pushing the benefits of low-cost, passive investing. 

As Warren Buffett said: “Rather than listen to the siren's songs from investment managers, investors, large and small, should instead read Jack Bogle’s The Little Book of Common Sense Investing.”

Key takeaways

  • Bogle believed ETFs' intraday liquidity encouraged investors to trade frequently, harming long-term returns and deviating from a buy-and-hold approach

  • He disapproved of complex ETF structures like thematic, leveraged and volatility-linked products, seeing them as speculative and potentially disastrous for investors

  • Bogle's vision of low-cost, passive investing through ETFs might be challenged by the rise of active strategies within the ETF industry

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