These days, it seems that bashing ETFs has become the "modus operandi" for the financial journalist. I get a chuckle out of many of the columns… some are actually amusing. I get a bigger chuckle out of the hypocrisy associated with ETF naysayers.

Perhaps the biggest opponent is the founder of Vanguard, John Bogle. Followers proudly call themselves, "Bogleheads." Financial writers simply describe him as a living legend in the mutual fund world.

So when Bogle speaks about ETFs… always in the pejorative…  I have to wonder why it’s difficult to find individuals to call the man to the carpet. Exchange-traded funds (ETFs) could just as easily be called exchange-traded index funds… and indexing is the essence of Bogle’s claim to fame. If you can get any index that you want with an ETF, with greater tax-efficiency and lower costs than traditional index mutual funds, why does Bogle insist on fighting against the new vehicle? Simple… his legacy is on the line.

Don’t worry, John. Your legacy remains intact. Yet it might be time to credit your colleagues at Vanguard for having the wisdom to introduce 33 Vanguard ETFs to the investing public. Some include:

Vanguard Total Stock Market IndexVTI
Vanguard FTSE All-World (excluding U.S.)VEU
Vanguard Total Bond Market IndexBND

Forbes columnists, Megan Johnston and Michael Maiello, had a blast with their take. The article? Beware: Exchange-Traded Fund Freaks. They make plenty of solid points, but I believe we should be able to consider a few counterpoints as well.

For example, the authors slam the iShares Silver Trust (SLV) for being rushed to market, just before the metal dropped 30% in value in the May-June gloom of 2006. Counterpoints? Silver, like many commodities, are not necesasarily meant for holding. (I sure don’t buy-n-hold commodities!) Further, even buy-n-holders have broken even with SLV less than 1 year later… which is better than many Vanguard 500 Index fund (VFINX) holders can say seven years after purchasing the index in March of 2000. Finally, does the untoward start for SLV mean that investors shouldn’t have easy access on the main exchanges for investing in silver?

Further fuel on the fire by authors M & M, was this comment: "The sponsors wouldn’t make ETFs if they didn’t make a profit on them." That’s correct, neither Vanguard nor Barclays nor State Street nor Powershares would introduce ETFs without a profit motive, which is indeed the definition of a for-profit business. That said, the individual investor spends less money on ETF investing than on mutual fund investing, perhaps as much as 1% less. And I have a sneaking suspicion that the hundreds of mutual fund families make a pretty penny on commissions, loads, 12b-1 fees, administrative costs and so forth on serving up inferior mutual fund products.

Naturally, I agree with the notion that there have been a number of lame and/or inane ETFs that sponsors have brought to the market. Nevertheless, the overwhelming majority of ETFs have been exceptional index-tracking vehicles that have empowered individual and instituitonal investors alike.

Besides, I’d rather invest in a Mid-Sized Spider MDY than a Roosevelt Anti-Terror Multi-Cap Fund (BULLX) Who’s really into gimmicks?

042307

Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.

Leave a Reply