VettaFi’s financial futurist Dave Nadig hosted a discussion of the recent book “The Bogle Effect” by Eric Balchunas, senior ETF analyst at Bloomberg, with Balchunas and Ken Nuttall, CIO of BlackDiamond Wealth. Both Nadig and Nuttall helped contribute to the book, and the discussion covered a wide range of topics related to Bogle, from indexing and the evolution of Vanguard to the relevancy of his approach and methodology in current times with things such as crypto.

The book is about John “Jack” C. Bogle, the founder and CEO of Vanguard Group and creator of the first index fund, and the way that he shaped and contributed to modern investment and the rise of Vanguard. Given the massive success of Vanguard, which brings in roughly $1 billion every day, it’s an important and relevant story for those within the financial world to know and understand, explained Balchunas.

Indexing has become “the governing force in asset management; there’s still room for 15-20% of things to be different and outside the reach of Vanguard but 80% of it is pretty much run by Vanguard’s ownership structure,” Balchunas said.

While Nuttall thinks that the financial industry would have eventually come around to the idea of indexing one way or another, it wouldn’t have happened nearly as quickly and resulted in today’s funds, some of which have fees that are a mere three basis points.

The creation of the first index fund was due largely to the circumstances that Bogle found himself in, having been fired from Wellington (his own company, Balchunas explained), with a drive for revenge and an aim toward creating a product that would outcompete others available at the time.

Crypto and “Bogle’s Hack”

Discussion pivoted to crypto and tokenization and Balchunas’s perspective that Bogle’s fundamentals align with the basic principles of decentralized finance (DeFi).

“His DeFi to me is much more organic than the DeFi in crypto you see being slung now. I think there’s super-billionaires being minted by the crypto world: nobody got rich with Vanguard, except for the end investor. That’s a big difference,” Balchunas said.

Nadig described the index fund methodology that Bogle created as “Bogle’s hack” to the financial system,  which continues to operate somewhat outside of the system to this day. In the long-term, Balchunas believes that there will be roughly 10-20 companies that will make their business primarily by offering these kinds of low-cost funds to investors.

“We hear a lot from a lot of clients that say ‘I just want Vanguard’,” Nuttall said. “It’s low-cost, it’s doing the right thing, it’s all that and it’s probably one of the best brand names financial services.”

Bogle’s Stance on ETFs

Bogle took a hard line about ETFs from their inception until close to the end of his life, when he came around slightly to the idea of the broad-based ETF but only in the condition that it wasn’t traded around but instead held by the investor. Bogle became increasingly single-minded about broad index funds as the only answer that investors needed during his time running Vanguard, and it’s a legacy that has carried on and is just now beginning to change with Vanguard pushing into a broader spectrum of ETFs.

“Honestly the solution to everything Bogle worried about is more competition from the asset managers: that is ultimately I think what all of it leads to is he wanted to see them do better and charge lower fees,” Balchunas said.

It’s actually because of this cheap core option that investors are dabbling in areas such as thematics and other options, according to Balchunas. Because of the fairly predictable performance of broad-based indexed funds, investors are more willing to engage with highly thematic funds that have extra volatility because they believe that their portfolios can accommodate it.

“I think we’re going to see more and more experimentation [from ETF issuers] to try and serve that 25% lane, not people going in and doing zero,” Balchunas said.

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