John Bogle is the founder of Vanguard, a mutual fund firm and one of the founding fathers of the index industry. In investment circles Bogle is a legend because he has preached for more than 35 years what is now taking over the investment industry: Indexing. It is the idea that passive index funds are almost always beating comparable actively managed funds.

Here is a very recent speech of Bogle on a related topic: The use of ETFs (Exchange Traded Funds, tradeable index funds) for rapid fire trading or speculation. Bogle lies out a shocking case: He proves with hard numbers that traders who are using ETFs for speculation using rapid-fire trading techniques to move in and out of ETFs do much, much worse than the fund itself. He calculates that over the last five years index funds have shown a total of 6% positive returns whereas active investors using ETFs to time the market and trade were 12% negative. That is an average, but the numbers are consistent across 40 out of 46 major ETFs. This difference is much bigger than the difference between ETFs/passive index funds and active funds in general.

What is the take-away for a private investor? It is not enough to use index funds or ETFs. It is necessary that you hold them long-term. So, if your wealth adviser or private banker tells you that he uses ETFs make sure he is keeping them long-term and is not trying to trade and time the market. Because that could be indeed very costly for you.

This entry was posted on Monday, June 22nd, 2009 at 7:43 pm and is filed under Index Investments & ETFs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.