John “Jack” Bogle, founder and retired CEO of the Vanguard Group, is a staunch detractor of exchange traded funds, but the fund veteran’s feelings may be biased as the ETF industry continues to grow.
Bogle maintains that ETFs are a marketing innovation, warning retail investors about the investment vehicle as many would be tempted to day-trade the easily accessed offerings – ETFs, unlike traditional open-end funds, are traded throughout the day on an exchange, similar to stock securities.
Advisors and investors, though, look at ETFs as long-term holdings, not short-term trades. According to a recent BlackRock (NYSE: BLK) and Fidelity Investments survey, 88% of investors think of ETFs as being part of their long-term investing strategies. About 77% of advisors using ETFs in client portfolios see them as part of a long-term investing strategy, and 43% are using ETFs at the core of their portfolios. [Advisors, Retail Investors Seen Boosting use of ETFs]
Investors looking at ETFs as long-term holdings deal a blow to one of the primary arguments used by mutual fund companies for keeping ETFs out of employer-sponsored 401(k) plans. With little data to suggest as much, some fund companies have argued that by including ETFs in 401(k) plans, employees would be tempted to actively trade or even day trade their retirement accounts.
Critics have asserted that updating 401(k) balances daily rather than quarterly would lead to increased trading, but there is no evidence to suggest that because workers have the ability to trade his or her retirement account more frequently, investors would exploit the opportunity. [Low Fees Suport ETF 401(k) Push]
Instead, advisors and investors have turned to ETFs for their long-term allocation needs because of the ETF’s cheap fees. The average U.S.-listed passive index-based stock ETF has a 0.56% expense ratio, according to XTF data. [Efficiently Save Toward Retirement with Cheap ETFs]
In contrast, according to a recent research paper by Bogle, many workers who invest in actively managed funds are seeing returns diminished due to the costly fees – active managers charge about a 1.12% expense ratio for the average large-cap blended fund. Furthermore, Bogle points out that active funds pay a penalty for keeping a share of assets in low-yielding cash and estimates total costs could add up to 2.27% per year.
Bill McNabb, Vanguard’s current chairman and chief executive, also stridently disagrees with Bogle’s stance, arguing that ETFs are a great investment innovation that lowers the cost of investing for millions of investors, reports Chris Newlands for Financial Times.
Despite Bogle’s misgivings, the Vanguard Group is now the second-largest U.S. ETF provider, with $473.1 billion in ETF assets under management. Vanguard’s success as an ETF provider may be attributed to its cheap fees, with an average 0.13% expense ratio on its 67 ETF offerings.
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