Vanguard Group founder John Bogle famously isn’t a fan of exchange traded funds (ETFs). Now he’s released a study showing that investors generally make poor decisions when buying and selling them.
According to Bogle’s analysis, 68 of the 79 ETFs that were covered had investor returns that were short of the returns earned by the funds themselves. Additionally, investors seemed to do the worst in high-profile and volatile sectors such as emerging markets, financials and REITs, states Matt Hougan for Index Universe.
To criticize ETFs is a little like criticizing cars – just because people can and do misuse them and get hurt, the majority of people are responsible and careful. It’s certainly okay to raise some caution and make investors aware of the risks, but after that, it’s up to them.
We certainly know our readers at ETF Trends are educated, intelligent and curious – they’re constantly seeking out new information and strategies. It certainly isn’t fair to paint all ETF investors with the same brush when most of them do act in a responsible manner.
Bogle is a legend and the earliest proponent of indexing. He’s been absolutely right on that front, and we have the utmost respect for him and his work.
But to fight ETFs is a losing battle. They are indexing, they’re superior to mutual funds in every way and investors are realizing it. ETFs have made it easier for all types of market participants to grab their desired exposure to the market, they’re cheaper than mutual funds, they provide investors with hundreds of choices and they’ve made it easier for them to do the necessary research, thanks to transparency. Investors are simply better served in a way they haven’t been now that ETFs are in existence.
If you want to fight for investors, look at 401(k) plans instead. There’s far greater damage being done to Americans that way than any ETF could inflict.
ETFs offer great diversification, tax efficiency, low cost, transparency and exposure to sectors and areas that are otherwise difficult to gain exposure to. They key is to stay educated, have both an exit and entering strategy and don’t let emotion play a role in your investment decisions. Additionally, by utilizing a trend following strategy, you should be able to cut down on frequent trading and prevent transaction costs from eating away at your profits.
For more stories on 401(k) plans, visit our 401(k) category.
Kevin Grewal contributed to this article.