Bogleheads

[ddb]

Below are some comments on the John Bogle Fireside Chat sponsored by IndexUniverse.com, held earlier today at 10:00am EST.

Mr. Bogle (hereafter referred to as JB) began the chat with a discussion of the ETF marketplace, showing that ETF assets have caught up to open-end index fund assets. He continually refers to the ETF Model as a “Good Business Model”, but does not provide any evidence that ETF providers are making much money off the business model. It seems to me that ETFs are very good for brokers, advisors, individual investors, and index license providers, but I haven’t seen evidence that it’s a great money-maker for the ETF providers.

JB showed figures for “annual share turnover” for 38 ETFs that they analyzed. This was based on annual share volume for ETFs. He indicated that a high annual share turnover is a negative for individual investors (in fact, it might be a positive as it reduces bid-ask spreads). He then somehow compared this annual share turnover to open-end mutual fund redemptions in 2008, which has no relevance. I’m not sure if he actually thinks these are relevant items or if he is just trying to fool the public. Either way, a very questionable part of the presentation.

JB then looks at the “investor lag” (defined as a fund’s dollar-weighted return minus time-weighted return) for ETFs by style, and finds significant investor lags for a trailing 5-year period. This is no surprise, as we all know that typical investors exhibit poor investing discipline. He compares the investor lag for ETFs to a sampling of Vanguard open-end index funds. Not surprisingly, the Vanguard open-end funds have smaller investor lags. This is wonderful evidence that the typical Vanguard investor has good discipline compared to the typical ETF investor. Of course, JB uses the evidence as further indictment against ETFs. He says, and I quote, “So clearly, ETFs are not acting in the best interest of their investors.” How does this follow from any of the data he showed? In fact, the useful data on his slide, which he didn’t mention, was that the TWRs of ETFs were approximately the same as the TWRs of the relevant Vanguard open-end fund, suggesting that ETF providers are managing the money as effectively as Vanguard open-end funds manage the money. This is what should matter to individual investors.

I would have re-titled JB’s presentation: “ETF Investors Are Not Very Successful”. Instead, he went more with “ETFs are Bad Compared to Open-End Funds”, even though none of his data support this. Of course, during the Q&A on this topic, he concedes that there is no particular advantage in purchasing, say, the Vanguard S&P 500 fund over the SPDR S&P 500 ETF (other than transaction costs, if applicable). Okay, then why did you just try to convince all of us that ETFs are evil for the individual investor? He also then concedes during the Q&A that the frequent trading of ETF shares doesn’t appear to have an impact on the long-term ETF holder!

During some brief comments during the Q&A, JB derides exchange-traded notes, and mentions that some ETNs have even gone bankrupt and investors lost all their money. Can anybody here point to a case where this has happened, or was he making that up?

JB took a question about the usefulness (or lack thereof) of advisors, and discussed compensation. He seems to think that advisor compensation should start at 1% of AUM and be scaled-down as assets increase into the 6-figure range and beyond. It should be noted, though, that this call was marketed to advisors, so it’s possible he was being overly generous to the target audience (because I’ve not heard him say anything like this before).

Then there were lots of questions about allocation, leveraged funds, market-timing, government action, projected returns, projected dividend yields, etc. They all received the answers you would expect from JB.

- DDB
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"I know that your friends are my friends and, uh... I've thought about that. You can have 'em" - PB

[speedbump101]

I certainly enjoyed the 'webinar' with Mr. Bogle... Index Universe will be posting it in entirity on their site shortly.... http://www.indexuniverse.com

SB...
_________________
“Knowledge is often mistaken for intelligence. This is like mistaking a cup of milk for a cow."- Bradford K Hull

[TheEthicalAdvisor]

I will add to what ddb already posted and add some JB quotes that I got from the meeting that were either fun or interesting to me:

About Barclays deal:

Barclays deal is "very costly" and the iShares are going to have to come down in price to compete.

"It is going to be a hard business to grow business [given current] 50% market share...[Market share] will make it hard to grow without change"
After last year, "indexing should look like a very good business to Blackrock/Barclays".

About the TARP program:

Under TARP, Bogle says that he is uncertain that the PPIP will provide any more liquidity to the system of paying down the toxic assets. The government had to instate the TARP because the debt in this country approached around 135% of total GDP vs a standard of about 60% traditionally.

ETFs/ETNs:

-ETFs do not have a significant difference in the long term compared to the index that they track, but short term, ETFs are very dangerous.

-Leveraged ETFS and ETNs "verge on insanity".

On passive versus active investments:

-Question: "Are there any other actions in life that are passive like what you promote in investments?"

JB: "The financial markets are different than any other endeavor in life. [...] You, as the investor, sit at the bottom of the food chain...you get paid after everyone else on Wall Street."

On having a financial advisor:

-Question: "Is there a reason to have a financial advisor?"

JB: "Investment advisors play an important role in fund selection and diversification..." ...and helping with lowering the emotional
side of the issues. "Have an advisor help you capture the most amount of return that you can"... "On a $10,000, $50,000 OR $100,000 account it would be alright to charge 1%"..."as the account grows 1% scaled down based on assets seems appropriate"...He hopes that advisors begin to behave like lawyers or CPAs and charge based on services
rather than a % of assets.

My favorite classic Bogle response with humor:

-Question: "What role do inverse ETFs play in hedging against issues in long term trading for certain people that have a
hard time stomaching it?"

JB: "NONE! Did I make my position clear enough!"..."I think anybody that [uses these funds] are crazy, but I still wish them well!"

-Evan

[camper]

-Question: "What role do inverse ETFs play in hedging against issues in long term trading for certain people that have a
hard time stomaching it?"

JB: "NONE! Did I make my position clear enough!"..."I think anybody that [uses these funds] are crazy, but I still wish them well!"

This too, was my favorite quote of the day.

I think the main point I took from this is that if you hop in and out of an ETF, you should expect lower returns. ETFs can be a good investment for the long term if you are not in the accumulation stage. The reason being the transaction costs.

[TheEthicalAdvisor]

[ddb]

[conundrum]

Agree with ddb.

ETFs can certainly be a good thing if used appropriately. All investments can be abused.

Drum

[uncleJohn]

I used to believe that ANY fee paid to an advisor for asset allocation was ridiculous.......until I observed that most (not all) investors do not have the emotional capacity to manage their investments in the highly disciplined, tax-efficient, unemotional way that it takes to be successful longer-term.

I think up to 1% is a small price to pay for most investors to avoid all the available mistakes they could make during an investment lifetime. Some investors can master all three of the imporant traits I mention above but many others are deficient in at least one of them. I have observed that some of the most knowledgeable investors lack the emotional fortitude it takes to hang on and especially rebalance (if bonds are your thing) during bear markets. And I have observed many others hold on to the most tax-inefficient investments during their entire investment lifetimes and make no allocations at all, even though their situations have changed dramatically.

I wouldn't be surprised if even the most knowledgeble investors on this forum have made them. It doesn't take much of either mistake to compound at 1% annually over a lifetime. The 1% could even be viewed as a small insurance premium against natural human behavior.

Just an observation.

[ddb]

[mike.bayer]

[ddb]

[TheEthicalAdvisor]

[TheEthicalAdvisor]

[sschullo]

Great discussion and agree with the insights.

My point has to do with the passive/active question, aimed at tripping up JB. The questionnaire wanted an example of people using passive strategy outside of the financial markets. For example, would you want your doctor to be passive?
JB stuck with his standard response; of course, JB admitted that you do not want your physician to be passive, but the financial markets are different from other enterprises.

Not the best response for hard core active investors because there are two political examples of a passive strategy:
One sent the most powerful empire of the era, England, packing from India and the other example was getting rid of a century of legalized and institutional segregation in this country: Gandhi and Dr. M. L. King respectively. The same concept of "non violence" worked perfectly in very different social, economic and political worlds.
_________________
The market is weird. Every time one guy sells, another one buys, and they both think they're smart!

[sotaboy]

ddb

[Murray]

Sorry to double-post ... another thread is discussing this topic as well ... as I brought up in that conversation, a complete transcript of the Bogle Webinar should be up on IndexUniverse.com on Thursday ... videos are coming, too.

[DWD]

[uncleJohn]

ddb & TheEthicalAdvisor:

Both points are "spot on". Quite the irony, eh? And let's face it-if you know enough about the appropriate way that money should be managed, then you probably don't need an advisor.

Therefore, most advisors are most likely hired for reasons other than those we mentioned. And there obviously is a market for it.

[Trifecta]

[Trifecta]

[Rick Ferri]

I do not often disagree with Jack, however his knock in ETFs is over the top. ETFs are nothing more than a platform for delivering an investment strategy. Whether that investment strategy be an benchmark index or some other product is irrelevant. How investors use that platform is his issue, not the platform itself. I wish that Jack would make that clear.

Rick Ferri

[uncleJohn]

Rick,

That is 100% correct. I love Jack Bogle to death and agree completely with his "costs matter" approach. However, I would love to see him focus some of his energy providing more information on the impact of investor behavior costs. We are all aware of the often-cited Dalbar studies but even a zero cost mutual fund can be lethal to some investors.

I know he "knows" it and adresses it but he has certainly spent more of his effort quantifying expense ratio impact rather than investor behavior costs--perhaps because it is quite difficult to quantify the latter.

[ddb]

[mike.bayer]

Just because I own a shotgun does not mean I'm going to use it to blow my head off. ETF's are one of the most powerful investment tools that have ever been created.

[political policy comments removed by admin alex]

[sschullo]

[ddb]

[sschullo]

[DWD]

[speedbump101]

My apologies if this has already been posted...

Here is the full transcript of Jack Bogle's fireside chat last week hosted by Index Universe (in both audio and in Adobe format)...

Bogle Fireside Chat

SB...
_________________
“Knowledge is often mistaken for intelligence. This is like mistaking a cup of milk for a cow."- Bradford K Hull

[Taylor Larimore]

Bogleheads:

I thought this was an interesting part of the interview (particularly the bond part):

[biasion]

[Rick Ferri]

[sschullo]

[Barry Barnitz]

The move towards ETF use in Corporate retirement plans is in its infancy, but is likely to grow (think BlackRock with ishares).

Links:
WisdomTree Launches ETF-Friendly 401K Platform

InvestnRetire

ETFs Find New Routes to 401(k) Plans

regards,
_________________

blb
December Birthday Celebration: Ludwig van Beethoven

[TheEthicalAdvisor]

Barry,

You beat me to it! It is interesting what InvestNRetire is trying to accomplish (providing ETFs in the retirement space for a very reasonable cost), and I do hope that it brings more competition to the 401k/403b marketplace. Rick, or anybody else, do you have any knowledge about InvestNRetire? I have read several articles about this company in industry magazines, but do not have any first hand experience with them. TIA!

-Evan