Jack Bogle is often given as an example of a legendary investor whose disdain for exchange-traded funds was just as legendary. However, many overlook some important nuances, namely that he was not against all ETFs; just some of them and how they were used.
In fact, he wrote in "The Little Book of Common Sense Investing":
“There is nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you don’t trade them. While short-term speculation is a loser’s game, long-term investment is a proven strategy, one that broad market index funds are well positioned to implement.”
As the founder of Vanguard Group and the creator of the first index mutual fund, Bogle was highly influential in shaping the philosophies and best practices around indexing and passive investing. His writings and speeches over the decades reveal insightful perspectives on ETFs versus traditional index funds, or TIFs.
Understanding ETFs and TIFs
An ETF or exchange-traded fund is a basket of securities like stocks or bonds that trades on a stock exchange. ETFs were created to track indexes, sectors or commodities and provide broad diversification like mutual funds, but with the ability to trade intraday like stocks.
TIF stands for traditional index fund. This refers to conventional open-ended index mutual funds that track market indexes. TIFs can only be traded once per day after market close. The first TIF was created by Bogle himself in 1976—the First Index Investment Trust tracking the S&P 500, now known as Vanguard 500 Index Fund.
Bogle's advocacy for broad-market TIFs
Bogle was a staunch defender of traditional index funds that track broad market indexes like the S&P 500, the total U.S. stock market, the total U.S. bond market and international indexes. He saw these as providing the maximum diversification, lowest costs, greatest tax efficiency and highest share of market returns over the long haul.
Specifically, Bogle recommended holding a simple portfolio of low-cost TIFs like:
- Vanguard Total Stock Market ETF (VTI, Financial)
- Vanguard Total International Stock (VXUS, Financial)
- Vanguard Total Bond Market ETF (BND, Financial)
In Bogle’s view, these TIFs embodied the original principles of indexing: broad diversification across the entire market, rock-bottom costs, buy-and-hold investing for the long term and assurance of earning one’s fair share of market returns.
Concerns over specialized ETFs
However, Bogle growled at the proliferation of more exotic, specialized ETFs that sliced and diced the market into ever-narrower niches. He warned that straying too far from broad diversification usually resulted in funds with higher volatility, costs and taxes, not to mention speculative short-term trading.
Bogle criticized ETFs focusing on specific sectors, countries, industries, factors, leveraged strategies and other concentrated bets. In his book, "The Clash of the Cultures," Bogle wrote, “The ETF has become a marketing and promotional vehicle, engaged in a futile search for the holy grail of extra returns.”
ETFs and active investing
One of Bogle’s biggest laments was how ETFs were being used predominantly for speculation through rapid trading. He pointed out the irony that ETFs were “passive funds owned by active investors.” In other words, trading ETF shares was akin to active management within passive vehicles.
Bogle believed most ETF trading constituted fruitless speculation, not prudent long-term investing. He warned this high turnover resulted in inflated costs, taxes and, ultimately, self-defeating performance chasing. In a speech, Bogle said, “ETFs are clearly passive funds owned by active investors. Active investing is trading, active investing is speculation, active investing is losing.”
Appropriate use of broad-market ETFs
Importantly, Bogle was not against all ETFs. He acknowledged there were legitimate uses for ETFs tracking broad stock and bond indexes like with the Vanguard S&P 500 ETF (VOO, Financial), Vanguard Total Stock Market ETF, Vanguard Total International Stock or Vanguard Total Bond Market ETF, assuming they were bought and held for the long run.
He admitted a broad stock market ETF like SPDR could be an acceptable alternative to its TIF counterpart if used properly as a long-term holding. In some cases, the added liquidity and potential tax benefits of ETFs could be advantageous.
But Bogle always cautioned ETF investors to treat them as long-term investments, avoiding the temptation to trade excessively. He believed TIFs were better suited to discourage counterproductive market timing based on their once-a-day pricing and trading.
Keeping things in perspective
While Bogle singled out ETFs for criticism at times, he also maintained perspective. In a CNBC interview, he reiterated that “there’s nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you don’t trade them.”
He reminded critics that active fund managers replicated indexes similarly to ETFs, so concerns about oversized ETF ownership were somewhat exaggerated. Bogle realized active trading itself was the root issue, whether in ETFs, individual stocks or actively managed funds. Short-term speculation was hazardous regardless of packaging.
The resilience of TIFs
While ETFs grabbed headlines and drained TIF cash flows for a time, Bogle noted TIFs had impressively outpaced ETF growth since the financial crisis—disproving notions they would fade into obsolescence. Just as TIFs slowly disrupted active funds over decades, Bogle expected their ultimate ascendance over ETFs once investors recognized the wisdom of long-term, passive investing in simple, diversified market baskets.
Bogle's evolving views on ETFs
Bogle’s perspective on ETFs evolved over time. Early on, he was highly critical, calling ETFs “one of the worst innovations yet devised by man” and “a traitor to the cause” of indexing. However, in later years, he acknowledged the potential benefits of ETFs. He accepted that broad market ETFs could be reasonable substitutes for TIFs, assuming they were used properly for long-term buy-and-hold investing.
Bogle realized that excessively trading ETFs, not the ETF structure itself, was the real issue. His main concerns were speculative trading patterns and investors foolishly chasing performance trends. While never fully endorsing ETFs, Bogle adopted a more nuanced stance. He focused more on the need to reduce costs across all investment products and encourage sensible long-term behaviors.
Impact on the ETF industry
Despite Bogle’s criticisms, ETFs grew exponentially for years. However, the ETF industry took note of Bogle’s warnings. Many firms now actively market ETFs as long-term investments rather than short-term trading vehicles. ETF providers also simplified their product lines after the perceived excess of overly complex niche offerings Bogle lambasted. More advisors emphasize core ETF portfolios of total market funds over tactical sector bets.
So while Bogle failed to halt the ETF juggernaut, he influenced the industry’s evolution toward simpler, more long-term-oriented products. ETFs pivoted toward resembling TIFs in philosophy if not structure.
Relevance of Bogle's views today
While Bogle passed away in 2019, his perspectives remain highly relevant. New exotic ETFs like leveraged and inverse products continue proliferating. Speculative trading activity dominates ETF volumes. Meanwhile, TIFs keep quietly delivering market returns to disciplined long-term investors. Just as Bogle predicted, trading-oriented ETFs have largely failed to outperform over full market cycles.
Bogle’s philosophy serves as a timely reminder of what matters most—low costs, diversity, patience and temperament. The allure of outperformance through complex ETFs almost always disappoints versus prudent indexed approaches. Perhaps the simplest encapsulation of Bogle’s wisdom is this:
“Don’t do something, just stand there.”
Remaining disciplined through volatility, ignoring fads and steering clear of speculation remain the ultimate keys to investment success.
