Why Index Fund Creator Jack Bogle Hated ETFs

The encomiums are pouring in for Jack Bogle, who launched the first index funds and sang their praises for decades. But what’s less known about Bogle, who died Wednesday, was that he loathed index funds’ progeny, exchange-traded funds.

Like index mutual funds, ETFs are low-cost and mostly follow the S&P 500 and other such indexes. To Bogle, who founded Vanguard Investments and powered it to prominence on index funds, ETFs are nasty creatures. Because they can be bought and sold like a stock (unlike mutual funds, which all settle at the end of the day), ETFs are used for fast trading by Wall Street sharpies, who often short them to hedge their positions.

Result: Their prices jump around too much, which as a true believer in stable, buy-and-hold investing, Bogle found troublesome. In an interview last fall with Morningstar’s director of personal finance, Christine Benz, he lamented that the S&P 500 SPDR and kindred ETFs “turn over, I think, 5,000% a year.”

“Is there anything the matter with that?” he asked. The rapid trading, he said, doesn’t have “any social good.”

For more stories like this, sign up for the CIO Alert newsletter. 

Bogle liked the reliability of index funds, where risk is relatively lessened because you own the market as a whole, as opposed to taking a chance on an active manager who may bomb out. Active fund managers charge too much money, he famously contended. ETFs are just as low-cost as their index fund relatives, but he was dismayed at the increasing use of them—and when Vanguard started offering them after his retirement, he was enraged.

A few years ago at a conference of his devotees, known as Bogleheads, he said that “ETFs are like the famous Purdey shotgun. Great for killing big game in Africa and great for suicide.”

He loved to disparage the new, and frankly offbeat, indexes that have been invented to issue ETFs. “We have a vegan ETF,” he marveled. And he especially denigrated “reverse leverage” ETFs, where investors are betting against the market and magnifying their gambles with high debt. For him, this practice was a recipe for disaster.

“Trading,” he told Morningstar, “is the investor’s enemy.”

Tags: ETFs, index mutual fund, John Bogle

The UK’s Pensions Administration Standards Association (PASA) is forming a new industry group to help pension plans abide by the High Court’s landmark ruling on the equalization of guaranteed minimum pensions (GMPs).

In October, the UK’s High Court ruled that Lloyds Banking Group’s pension plans must equalize GMPs for men and women. The court said pensions provided to members who had contracted out of their plan must be recalculated to ensure payments reflect the equalization of normal retirement ages in the 1990s. Experts estimated that the ruling could cost providers £10 billion ($12.9 billion) to £20 billion in payouts.

The ruling also means that thousands of defined benefit pension plans will have to amend their rules and equalize GMPs between men and women. However, the court did not establish a method for equalization, and said that multiple methods are available.

“We recognize the value that best practice guidance on GMP equalization will provide,” said Geraldine Brassett, a PASA board member who will chair the new group. “GMP equalization projects are likely to be complex, so it is important that advisers, administrators, trustees, and employers work collaboratively to ensure cost-effective delivery and clarity for scheme members impacted.”

For more stories like this, sign up for the CIO Alert newsletter. 

The group will be made up of representatives from across the industry, including from the May administration, as well as from the legal, advisory, actuarial, data, and trustee sectors. It is tasked with developing and promoting best practices on issues arising from the ruling, including how to address missing data, and how to deal with transfer requests and rectifying underpayments.

PASA was formed in 2011 as a not-for-profit organization to promote and improve the quality of pension administration services for UK pension plans.

“Delivering GMP equalization will be challenging and we welcome this initiative to bring clarity to the market,” David Fairs, The Pension Regulator’s executive director of regulatory policy, said in a release. “It will take some time to work through all the issues. Establishing best practice will help [the] industry do this as efficiently as possible, and minimize disruption to routine scheme business.”

Tags: Guaranteed Minimum Pensions, Pensions Administration Standards Association, UK