Bogle on ETFs : Handle with Care

[mickeyd]

San Francisco, Calif.: Are ETF's that index really a good alternative to index mutual funds, or just another warmed over product?


John C. Bogle: I have to give you a complicated answer. A total stock market ETF bought and held for an investment life time and operated at minimal cost is a perfectly good alternative -- maybe even a hair better -- to a standard total stock market index fund. So spiders and vipers, bought and held are fine. The problems with ETFs are two: 1. Even these total market funds are turned over at a frenetic pace by investors, trading something like $10 billion dollars every day -- a 20% daily turnover, or 5,000% per year. 2. The overwhelming number of ETFs are narrow speciality funds, specific foreign countries, specific industries, and the like, also traded like stocks. I think this latter group of ETFs are a better way to speculate than speculating in individual stocks. But I believe -- deeply and profoundly -- that speculation is a loser's game. I look at ETFs then, as I might look at a shotgun, wonderful for hunting, and equally wonderful for suicide. Handle with care!

 

[Danny]

Have been buying the following ETFs (and I did call Bogle and promised that this time I swear I'm not going to overtrade them.

Indexed ETF
TIP
LQD
AGG

Closed-End ETF
VBF
WIW
ACG
AOF
GVT

 

[cute fuzzy bunny]

I wonder if theres anything psychological about it. When I think ETF I think "stock" and when I think stock, I think "how long until I sell...whats my trigger point. When I think Mutual Fund, I think more long term.

I wonder how much attractiveness ETF's would have to their buyers if you made them trade once a day after close of business, just like a fund rather than change price and be buyable/sellable every 1.2 microseconds...the "real" benefit of being able to buy and sell for a normal investor is really pretty small...but I'd bet a lot less people would buy them.

 

[Danny]

I wonder if theres anything psychological about it. When I think ETF I think "stock" and when I think stock, I think "how long until I sell...whats my trigger point. When I think Mutual Fund, I think more long term.

I wonder how much attractiveness ETF's would have to their buyers if you made them trade once a day after close of business, just like a fund rather than change price and be buyable/sellable every 1.2 microseconds...the "real" benefit of being able to buy and sell for a normal investor is really pretty small...but I'd bet a lot less people would buy them.

Thanks for changing your picture.

ETF's work better for me - I hate the restrictions on selling mutual funds - getting penalized by broker/Mutual fund for selling before 90 days for example.

 

[Nords]

So spiders and vipers, bought and held are fine.

Boy, can that be taken out of context!

I wonder if Bogle was using the shotgun analogy before Cheney made it so popular...

 

[cute fuzzy bunny]

Thanks for changing your picture.

ETF's work better for me - I hate the restrictions on selling mutual funds - getting penalized by broker/Mutual fund for selling before 90 days for example.

just wait a while. I have one you're REALLY going to like.

Ah, the broker/fund conundrum. Holding the funds with the actual fund company usually eliminates any fees/penalties except minimum holding times for a very small number of funds.

maybe that again reinforces the 'immediacy' of etf's as well as any concerns/issues about turnover....I'd imagine many people buy them through a regular ameritrade type brokerage while I'd think a fair number of people who own funds own them through the fund company directly. Or is that even true? I wonder what percentage of people own funds with the fund company vs a 3rd party brokerage.

I *used* to own funds through my brokerage, but it was more onerous and had reporting problems that I didnt have when I used the fund company directly. and that was when vanguard required a frickin form to be mailed to them to do anything interesting.

 

[brewer12345]

I like ETFs better, in general. They are usually at least a bit cheaper than open ended fund euivalents, I can buy them via any brokerage account (useful when your broker doesn't have a "best in class" mutual fund), and I can hedge with puts or sell covered calls on my positions if I wish to do so. Much more flexible.

 

[bpp]

I use ETFs (mostly VIPERs) just because they are cheaper than their open-ended counterparts. The trading-like-a-stock part is actually a drawback, since it means I have to stay up at night until the markets open in New York to buy them, whereas mutual fund purchases can be scheduled in advance. I would prefer CFB's hypothetical scenario.

Bpp

 

[cute fuzzy bunny]

Huh...my old broker (ameritrade) used to let me put in trades and they'd execute them first thing when the market opened.

 

[bpp]

Huh...my old broker (ameritrade) used to let me put in trades and they'd execute them first thing when the market opened.

So does mine (TDW), but the bid-ask spreads often look wacky before the market opens, which makes me a bit afraid of falling into someone's sneaky trap.

Bpp

 

[free4now]

If there's no particular hurry for getting in on an ETF, I like to buy with a limit order a little bit lower than the current market price. If it works the first day great, if not I'll raise the limit until it executes. This is something you can't do with mutual funds.

It's a form of timing and has the risk that I could end up missing out on a steep sudden rise in that ETF, but most of the time I'm getting a little freebie by effectively betting on volatility. And unlike buying an option contract to bet on volatility there are no extra fees or spreads since I'm doing the transaction anyway.

 

[Danny]

If there's no particular hurry for getting in on an ETF, I like to buy with a limit order a little bit lower than the current market price. If it works the first day great, if not I'll raise the limit until it executes. This is something you can't do with mutual funds.

It's a form of timing and has the risk that I could end up missing out on a steep sudden rise in that ETF, but most of the time I'm getting a little freebie by effectively betting on volatility. And unlike buying an option contract to bet on volatility there are no extra fees or spreads since I'm doing the transaction anyway.

http://intelligentspeculation.blogspot.com/2007/03/when-buying-stock-etfs-or-cefs.html