John Bogle Op-Ed in Wall Street Journal

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.