Vanguard Founder is Critical of Exchange Traded Funds

The so-called father of indexing still not a fan of exchange-traded funds. John Bogle, founder of The Vanguard Group Inc., believes low-cost, passive indexes are the best way to invest - as long as they're not offered through an exchange-traded fund. Mr. Bogle has said, "There's no question that ETFs are the greatest trading innovation of the 21st century." But he went on to surmise that ETFs are not the greatest "investment" innovation.

Institutional investors often trade ETFs frequently throughout the day. Mr. Bogle questions why anyone would want to do that. His belief is that such intraday trading often leads to bad decisions by investors, such as buying high and selling low, which cause them to underperform over the long run.

Mr. Bogle also expressed reservations about the number of ETF products that now are on the market, which he says makes it even more difficult for investors to pick the right fund. He called out BlackRock Inc. for its aggressive product launches. "BlackRock is just making a muddy pool muddier," he said. BlackRock's ETF arm iShares offers more than 260 ETFs. That's nearly 100 more than the next biggest ETF lineup. Vanguard currently offers 47 ETFs.

We agree with Mr. Bogle's comments. There are numerous ETF products available to investors. Unfortunately, many retail investors and brokers do not understand the nature of the products. Many brokers recommend leveraged ETFs as long-term, buy-and-hold investments, when those products actually are designed to be short-term trading instruments. Investors who are misled by their broker in this fashion often suffer substantial losses. Investors who have lost money in leveraged ETFs may be able to recover their losses from the brokerage firm that recommended and sold the EFTs. Such claims generally are that the brokerage firms failed to adequately describe the nature of the products, including the risks of the ETFs and the fact that the products are not designed to be bought and held for the long term like a mutual fund.

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