Vanguard founder and former chief executive Jack Bogle has criticised the high-trading mentality behind ETF funds and claimed non-listed index counterparts are a better alternative.
In an opinion piece for the Financial Times, Bogle, the founding father of index investing, says Vanguard investors in non-listed index funds have seen higher returns than its ETF investors who hold the same underlying portfolio.
Bogle attributes this disparity to the higher trading activity that comes with listed ETFs compared to non-listed index funds.
“Time and again, clear statistical evidence has confirmed that the more investors trade, the more their returns fall short of the stock market return,” Bogle says.
Bogle points out that he created what he likes to call “traditional index funds” and does not agree with the trading mentality behind ETFs, which launched 16 years later in 1993.
While individual investors are the largest holders of Vanguard “traditional index funds”, Bogle says banks and financial intermediaries hold almost 90 per cent of the SPDR S&P 500, the first ETF. He points out redemption rates in the former sits at 8 per cent of assets, while in the latter annual turnover reaches 3,000 per cent.
ETFs account for nearly half all trading on the US stock market, Bogle says.
As a result, he claims traditional index investing has revolutionalised the mutual fund industry, while ETFs have transformed the stock market.
While Bogle is critical of ETFs, he says index investing as a whole has seen inflows of $1.7trn of inflows since 2007, while active funds have seen $747bn of outflows – a trend he says shows no sign of slowing.
Bogle adds that robo-advisers are another disrupter of traditional finance and says they would not have been possible without ETFs.