Bogle: Smart Beta ETFs Give Investors False Promise

Vanguard Jack Bogle founder says his longtime strategy of sticking to index funds is still the best bet - strategic beta ETFs will disappoint investors

Christine Benz 26 October, 2017 | 12:06AM
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Christine Benz: Hi, I'm Christine Benz for Morningstar. Strategic beta products have proliferated in the marketplace. As part of the annual Bogleheads conference, I sat down with Vanguard founder Jack Bogle to get his take on these products.

I'm guessing that you are still feeling that these products generally don't deserve a role in investors' portfolios.

Jack Bogle: They're giving you a false promise. Value is going to do well some of the time. Look at the resurgence of the growth this year. Our growth fund index is up 21% this year and our value fund index may be 8, something like that. Complete reversal of what it was last year. These things have happened since the beginning of markets. It's called reversion to the mean.

I have my little debates with Cliff Asness on this. He thinks value is pretty much eternal, and I don't. We remain very, very good friends. We can talk about these things rationally, and I would consider him one of the giants of the alternative asset industry, not the hedge fund industry because none of them are hedge funds or most of them are not hedge funds.

The market is going to do its rotation. Stocks are going to get overvalued. Stocks are going to get undervalued, and when somebody figures out that they're undervalued and buys them, it's a great opportunity. But don't forget he bought them from somebody who sold them. There's no way to beat the market overall. There just isn't because we're all trading with one another.

These things, I've been saying them for a long time, I think I was saying the day I got born in 1929, probably a little garbled. I just don't think in the fundamental rule of the markets is an absolute rule. The less you trade the more you make; and the less you pay, the more you make. You put those two things together, and the answer miraculously appears up in the sky in red lights: index funds.

So, what can you do? I try and think what can destroy this hypothesis? I listen when somebody writes something bad about it, I read them with care. I think through what they're saying, and I haven't found one that's worthwhile. I mean, the idea that we're Marxist is crazy. There are a lot of them floating around.

This an idea that no mutual fund can own more than one stock in the industry. This from people who don't know how to--in their own words--who don't know how to even define industries. I mean, I don't know what industry Amazon is in. Maybe you do.


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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.

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