Bogle: Investors Getting Killed In ETFs

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Murray
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Bogle: Investors Getting Killed In ETFs

Post by Murray » Wed Jun 17, 2009 5:02 pm

Just thought I'd point out an interesting new story that came out of Mr. Bogle's Webinar today.
He presented a new analysis of investor returns in ETFs ... with some pretty interesting results!
You can see the story here:
http://www.indexuniverse.com/sections/n ... -etfs.html

(By the way, a full transcript of his complete Webinar, which included questions and answers from participants, should be up on IndexUniverse.com tomorrow ... with a video coming, too.)

detifoss
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Post by detifoss » Wed Jun 17, 2009 5:30 pm

Of course, this doesn't account for those etf trades made for TLH - tax swapping among ETFs is one of their biggest benefits, but it will lead to incorrect information about true 'investor returns'...

cloudeleven
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Post by cloudeleven » Wed Jun 17, 2009 6:29 pm

I wonder if there has ever been a study of returns strictly of day-traders? Would be interested to see that.

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Post by TheEthicalAdvisor » Wed Jun 17, 2009 6:39 pm

This is actually already being discussed at:

http://www.bogleheads.org/forum/viewtop ... 1245279744

Be careful to take things in context also. The people who are "getting killed in ETFs" are those that are trading/short term holding the ETFs. Bogle mentioned during the Q/A that holding indexed ETFs for the long term investor (10+ years) are probably good because they seem to follow the underlying indexes very well. It is, however, interesting to see how poorly the average person trying to time the market is doing with ETFs vs passive index funds. The main culprit, according to Bogle, is turnover ranging from 200%-3000%+.

-Evan

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Post by ziggy29 » Wed Jun 17, 2009 7:29 pm

The problem here is that the reader can be left with the idea that ETFs are a bad idea and toxic to investors. But the reality is that ETFs can be used by buy and holders, but they are also more attractive to the manic traders who buy high and sell low. There's nothing inherent about the better, lower-fee ETFs which make them incompatible with long-term index investing.

This is a case of correlation not equaling causation.

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Post by thirdcamper » Wed Jun 17, 2009 7:40 pm

ETFs are just funds by another name, but ones you must pay a commission to trade.

bombcar
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Post by bombcar » Wed Jun 17, 2009 7:43 pm

I'm tempted to start a mutual fund that simply invests in VTI. Charge an expense ratio of 0.1% and I'll be set for life!

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Post by tfb » Wed Jun 17, 2009 7:52 pm

Some investors are getting killed in ETFs just like some investors are getting killed in open-end mutual funds.
Harry Sit, taking a break from the forums.

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Taylor Larimore
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"Day Trading is for Suckers"

Post by Taylor Larimore » Wed Jun 17, 2009 7:57 pm

cloudeleven wrote:I wonder if there has ever been a study of returns strictly of day-traders? Would be interested to see that.
Cloudeleven:

Odean and Barber tested over 66,400 investors between 1991 and 1997. Their findings: "The most active traders earned 7% less annually than buy-and-hold investors."

According to this article "Most estimates suggest that 80 to 90 percent of all day traders lose money."

Day Trading is for Suckers
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On Approach
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Post by On Approach » Wed Jun 17, 2009 8:21 pm

ETFs are just funds by another name, but ones you must pay a commission to trade.
I didn't pay any commission on any of the ETFs I bought last year, the only cost was the bid-ask spread. I plan on letting them fluctuate within very broad bands over a long period of time. I suppose I'll need to pay a commission if and when I eventually sell.

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Zook13
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Post by Zook13 » Wed Jun 17, 2009 8:31 pm

bombcar wrote:I'm tempted to start a mutual fund that simply invests in VTI. Charge an expense ratio of 0.1% and I'll be set for life!
A while back, I recall there being a mutual fund doing just that, however they were a bit more aggressive...

They were buying QQQQ and charging something above 1% for a ER. I think QQQQ represented 99% of the mutual funds' holdings...

That was a real eye opener....

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Post by caklim00 » Wed Jun 17, 2009 8:39 pm

bombcar wrote:I'm tempted to start a mutual fund that simply invests in VTI. Charge an expense ratio of 0.1% and I'll be set for life!
Except VTI is now up to .09 from .07 according the the latest prospectus.

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Post by grabiner » Wed Jun 17, 2009 9:09 pm

detifoss wrote:Of course, this doesn't account for those etf trades made for TLH - tax swapping among ETFs is one of their biggest benefits, but it will lead to incorrect information about true 'investor returns'...
Tax swapping is relatively neutral. For every investor who sells GWX and buys VSS in a tax swap, there will be another who sells VSS and buys GWX, so the investor returns for the two ETFs should be a wash. (Both are liquid enough that tax swapping should be feasible.)
Wiki David Grabiner

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Post by m_j_paquette » Wed Jun 17, 2009 9:29 pm

bombcar wrote:I'm tempted to start a mutual fund that simply invests in VTI. Charge an expense ratio of 0.1% and I'll be set for life!
Funny you should mention that. One of the options in my son's 401K is a mutual fund that invests entirely in QQQQ. There's a 1% load and a 0.75% expense for the fund, in addition to the QQQQ's expense.

Oh, in case you hadn't guessed, the 401K plan is run by an insurance company. :roll:

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Rick Ferri
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Post by Rick Ferri » Wed Jun 17, 2009 10:25 pm

This study on ETF investors is similar to a study Morningstar did on open-end mutual fund investors, with the same result.

The importance of investing for the long term

Let's be clear about these studies. It is not the product that is the problem (ETF or open-end fund). It is investor behavior. It does not matter if a person invests in an ETF or open-end fund, behavior drives investor returns.

Rick Ferri

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CABob
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Post by CABob » Wed Jun 17, 2009 10:51 pm

Rick Ferri wrote: Let's be clear about these studies. It is not the product that is the problem (ETF or open-end fund). It is investor behavior. It does not matter if a person invests in an ETF or open-end fund, behavior drives investor returns.

Rick Ferri
Well said.
Bob

detifoss
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Post by detifoss » Wed Jun 17, 2009 11:33 pm

Rick Ferri wrote:This study on ETF investors is similar to a study Morningstar did on open-end mutual fund investors, with the same result.

The importance of investing for the long term

Let's be clear about these studies. It is not the product that is the problem (ETF or open-end fund). It is investor behavior. It does not matter if a person invests in an ETF or open-end fund, behavior drives investor returns.

Rick Ferri
+1

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Imperabo
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Post by Imperabo » Thu Jun 18, 2009 2:54 am

Rick Ferri wrote: Let's be clear about these studies. It is not the product that is the problem (ETF or open-end fund). It is investor behavior. It does not matter if a person invests in an ETF or open-end fund, behavior drives investor returns.

I suspect Bogle's point is that the increasing variety and ease of rapid trading of ETFs appeals to the worst aspects of investor behavior.

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Post by bmb » Thu Jun 18, 2009 9:44 am

Any studies of a buy-and-hold with ETF vs. the same fund? I expect it depends on the market price you pay, commissions and expense ratios, and how long you hold, but what about tax efficiencies or other considerations?

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Kenster1
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Post by Kenster1 » Thu Jun 18, 2009 10:44 am

CNN/Money: ETF Investing Done Right by Penelope Wang

http://money.cnn.com/galleries/2009/mon ... index.html

See Rick Ferri's suggestions for a Basic and Advanced 60/40 ETF portfolio.
"You can build a portfolio with just four or five funds that will give you plenty of diversification," says investment adviser Rick Ferri, author of "The ETF Book"
Example Advanced ETF Portfolio:

Code: Select all

VTI: 23% (US Stock - VG Total Stock Market)
IJS: 10% (US SV - iShares S&P 600V)
IWC: 3% (US Microcap - iShares Russell Microcap)
VNQ: 3% (US Real Estate - VG REIT)
-----------
VEU: 9% (Foreign Stock - VG FTSE All-World ex-US)
DLS: 6% (Foreign Small Value - WisdomTree Int'l Small Dividend)
DGS: 3% (EM Value - WisdomTree EM Small Dividend)
RWX: 3% (Foreign Real Estate - SPDRS DJ Int'l Real Estate) 
-----------
BND: 30% (Total Bond Market)
TIP: 10% (Inflation Protection Bonds)
Last edited by Kenster1 on Thu Jun 18, 2009 10:57 am, edited 1 time in total.
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Post by mortal » Thu Jun 18, 2009 10:49 am

The main reason i sold my etf holdings at td ameritrade, and moved them to vanguard was trading costs. When your adding to a portfolio of funds, these costs can really add up. The only thing ill miss is the ability to buy small chunks of etfs such as vde. I didnt feel like paying 30/y and 25/trade to have a broker acct.

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Rick Ferri
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Post by Rick Ferri » Thu Jun 18, 2009 11:16 am

mortal wrote:The main reason i sold my etf holdings at td ameritrade, and moved them to vanguard was trading costs. When your adding to a portfolio of funds, these costs can really add up. The only thing ill miss is the ability to buy small chunks of etfs such as vde. I didnt feel like paying 30/y and 25/trade to have a broker acct.
A agree. If you do not want or need a brokerage relationship, then direct Vanguard works very well. I wrote an article about this last year titled To ETF or Not to ETF.

Rick Ferri

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Kenster1
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Post by Kenster1 » Thu Jun 18, 2009 11:34 am

Actually, wouldn't it nice if someone could take the above sample Advanced ETF portfolio and bundle it into an ETF of ETFs?
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Post by bmb » Thu Jun 18, 2009 11:46 am

Based on the articles above, tentatively it looks to me that for buy-and-hold over any extended period if you use Vanguard Admiral or Institutional stock funds, there is likely to be essentially no difference in overall returns, while the standard class may be just a bit less rewarding than the ETF (you may save most of the difference in the annual expense fee) though at the cost of a little convenience.
I think I'll stick with Vanguard funds.

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Rick Ferri
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Post by Rick Ferri » Thu Jun 18, 2009 11:51 am

Kenster1,

That would be nice except that providers of ETF-of-ETFs want an arm and a leg for bundling funds together. One ETF-of-ETFs bundler called me earlier this week with a new ETF they are charging 1.6% per year to manage. I almost fell when they said the fee!

I asked twice to clarify:

"Did you say point one-six"
"No, I said one point six"
"That cannot be right! You are charging one point six on top of ETF costs?"
"Yes, that is correct."

Rick

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Taylor Larimore
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ETF transaction costs

Post by Taylor Larimore » Thu Jun 18, 2009 12:02 pm

Bogleheads:

We know that ETFs are usually unsuitable for investors making regular contributions because of transactions costs (commissions, spreads).

It is helpful to understand that regular withdrawals in retirement also incur these costs.
"Simplicity is the master key to financial success." -- Jack Bogle

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Kenster1
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Post by Kenster1 » Thu Jun 18, 2009 12:26 pm

For those who invest large enough amounts of money to offset the costs, then Folioinvesting.com is an alternative option -- they charge $29/mo and gives you unlimited commission-free trading in 2 daily trading windows. Foliofn has been around for a while.

So you can create a Folio containing say 50 ETFs if you wanted to. And here's the big convenience -- you do not have to go thru the hassles of setting up purchase orders per ETF. You just set up a single purchase order into the Folio and it will automatically disperse the investments across your ETFs based on your predefined allocation. This is similar to how you invest and add money to your 401k account that holds several funds.

Your asset allocation is now a bit out of whack due to the surge in some of your international etfs? A simple click of a button and your ETFs will rebalance itself -- and at no extra cost.
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Post by ziggy29 » Thu Jun 18, 2009 12:39 pm

Imperabo wrote:I suspect Bogle's point is that the increasing variety and ease of rapid trading of ETFs appeals to the worst aspects of investor behavior.
Maybe so. But you could also say, for example, that muscle cars appeal to the worst aspects of driver behavior.

Just because something has the potential to be used a little more irresponsibly doesn't mean that someone who uses it will be irresponsible. It's that correlation and causation thing...
Last edited by ziggy29 on Thu Jun 18, 2009 12:41 pm, edited 1 time in total.

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Post by ziggy29 » Thu Jun 18, 2009 12:41 pm

Rick Ferri wrote:Providers of ETF-of-ETFs want an arm and a leg for bundling funds together. One ETF-of-ETFs bundler called me earlier this week with a new ETF they are charging 1.6% per year to manage. I almost fell when they said the fee!

I asked twice to clarify:

"Did you say point one-six"
"No, I said one point six"
"That cannot be right! You are charging one point six on top of ETF costs?"
"Yes, that is correct."
Ouch. Presumably followed by:

*click*

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