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John Bogle Op-Ed in Wall Street Journal
jcbadmin - Feb 09, 2007

Today’s Wall Street Journal contains an op-ed by Mr. Bogle on the proliferation of exchange traded funds. In it, he writes:

But if long-term investing was the paradigm for the classic index fund, trading ETFs can only be described as short-term speculation. And it was only a matter of time until trading overwhelmed diversification as the driving force in the ETF world. Of the 690 ETFs in existence today (including 343 in registration at the SEC), only 12 represent broad market segments, such as the Standard & Poor’s 500, the Dow Jones Wilshire Total (U.S.) Stock Market Index, and the Morgan Stanley EAFE (Europe, Australia and Far East) Index of non-U.S. stocks. With each passing day, the market segments available through ETFs seem to get narrower. (Can you believe that we now have a “HealthShares Emerging Cancer” ETF?)

These nouveau index funds starkly contradict each of the principal concepts underlying the original index fund. If the broadest possible diversification was the original paradigm, surely holding small segments of the market offers less diversification and commensurately more risk. If the original paradigm was minimal cost, then holding market-sector index funds that may themselves be low-cost obviates neither the brokerage commissions entailed in trading them nor the tax burdens incurred if one has the good fortune to do so successfully.

The full piece is available at either of the links below.

Wall Street Journal website

PDF of article


Comments

bylo - Feb 09, 2007

An important warning about the darker sides of ETFs. For those of us located outside the US, however, the only way to benefit from Vanguard’s low fees and shareholder-first philosophy is to buy those funds as ETFs. The open-end share classes are simply unavailable due to regulatory barriers.

A historical note re “Ironically, that first ETF, created in 1992, was modeled on the classic index fund I designed three decades ago (now known as Vanguard 500 Index Fund), tracking the returns of the Standard & Poor’s 500 Index.”

The first ETF (then called an Index Participation Unit or IPU) actually began trading on the Toronto Stock Exchange in March 1990. It tracked the largest 35 stocks listed there and was known as TIPS35. It’s since been merged into what is today the largest Canadian ETF, BGI’s XIU [ http://www.tsx.com/HttpController?GetPage=QuotesLookupPage&DetailedView=DetailedPrices&Market=T&Language=en&QuoteSymbol_1=xiu&x=0&y=0 ] which now tracks the largest 60 Canadian stocks. Here’s a copy of the Prospectus from 1997 [ http://www.bylo.org/temp/TIPS%20Prospectus.doc - Word format]. Note the discussion of how ETF shares are created and can be redeemed for the underlying stock. Note also that since these securities were sponsored directly by the Toronto Stock Exchange, once the startup costs had been repaid, there were no management fees or other costs charged so TIPS35 also holds the record for the lowest-cost ETF. (BGI now charges an ER of 0.17%.)

Note also that the trustee and custodian of TIPS35 was State Street Trust Company Canada (until the merger into BGI’s XIU.) It’s therefore not surprising that SSgA, the sponsor of SPY, patterned the structure of their new ETF after the IPU.


THE SKILLED INVESTOR Blog - Feb 09, 2007

[...] This article is a heads-up to people interested in investment blogs and personal finance blogs. John C. Bogle, the founder of The Vanguard Group, Inc., has a blog called The Bogle eBlog. (If you are wondering about “eBlog,” it is an anagram of Bogle.) Mr. Bogle just posted an excellent article about the proliferation of exchange-traded funds (ETFs), which is a reprint of his Op-Ed article in today’s Wall Street Journal. If you are not a WSJ subscriber, you can find a link on his blog to a .pdf file of the full article. [...]


Bogle on ETFs | Interactive Investor Blog - Feb 13, 2007

[...] The father of the index fund, John Bogle, struck another blow in the war of the trackers in the Wall Street Journal last Friday. He says Exchange traded funds (ETFs) that track increasingly specialised markets serve none of the original aims of index tracking. Far from being diversified, he says:  Can you believe that we now have a “HealthShares Emerging Cancer” ETF? [...]


Could ETFs Become the Next Toxic Assets? – Real Time Economics – WSJ - Apr 14, 2011

[...] be sure, ETFs have been under a constant barrage of criticism from John Bogle, the legendary founder of Vanguard and the investor of index [...]



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