ETF’s What Are They And Can You Depend On Them?

Those that follow this blog already know our admiration of John (Jack) Bogle.  A personalized copy of his book, “Don’t Count On It” sits right beside my desk and is referenced nearly every week as we reach out to educate others about money management because it contains so many valuable insights.

Besides, Jack has been one of the most honest money managers out there when it comes to protecting the investor’s interests not the money managers interest.  He bucked the system when he founded Vanguard, with the minimal fees, and everyone in the industry thought he was crazy.  But Jack realized that actively (professionally) managed funds were not performing better than non-managed funds and he set out to rectify the way fees and transaction charges were destroying the profits investors should retain for themselves.  Historically looking back, Vanguard’s low fees changed the investment world forever.

Correspondingly, Jack Bogle envisages that the escalating sell of “ETF’s will quickly morph into active management, which means increased transaction costs and market timing.”[i]  Of course, Bogle realizes this is not in the best interest of investors but merely lines the pockets of money managers. His perception is that “many ETF’s are speculative in nature… and because from 2005 to 2017, the average return of an index fund was 8.4% compared to 7.2% for actively managed funds and 5.5% for ETF’s,”[ii]  he knows that this difference in growth is being left on the table for the money managers to consume.

Another concern that Bogle has is the volatility of the market.  In a recent CNBC interview, he stated that “I have never seen a market this volatile, to this extent, in my career.” And what an impressive career that has been 66 years of active trading.  In other words, Jack Bogle has been around the block more than once and his experience is worth listening to.

So, what is an ETF anyway?  It is an Exchange Trade Fund and have been around since 1993.  And to understand them better we need to compare what we already know about other funds.

  • “A mutual fund relies on a professional adviser to actively manage investments on behalf of others for a fee.”[iii]
  • “An index fund is a type of mutual fund constructed to match or track the components of a market index, that adhere to specific rules or standards that stay in place no matter the state of the market.”[iv]
  • “An ETF can be considered similar to an Index Fund although all ETF’s do not mimic index funds. And they often trade commission free.”[v]

Of course, Bogle’s concern stated above, is that ETF’s are going to quickly move from commission free into active management, where transaction costs and market timing will consume investors profits.

That being said, why face trading fees at all? Why not manage your own money and keep those fees for yourself?  This is what the Perpetual Wealth Code™ is all about and it allows for you to absolutely win your financial game instead of speculating about how you might possibly win.

ETF’s may serve a purpose that no other investment can but when people like John Bogle start making questionable future consequences that could unfavorably affect your bottom line, sticking to guarantees and no trading fees associated in participating whole life insurance sounds better and better.

[ii] Ibid