Jack Bogle was sure of his pioneering market invention, but he always had misgivings about what it had become.
Bogle, who died Wednesday the age of 89, devised the index fund in 1975 as a way for retail investors to be able to compete with the pros. Rather than bunch a group of stocks into a mutual fund with the hope of beating the market, Bogle found a way for investors to approximate the market’s performance but at a much lower cost than the high-fee mutual fund.
While he had no shortage of critics, and it took a while for the strategy to catch on, the idea would soon revolutionize investing.
So-called passive funds now hold nearly $7 trillion in assets and are catching up to the $11 trillion in active strategies.
But Bogle hadn’t been thrilled with the way the market adapted his idea.
When he put together the First Index Investment Trust, it was a mutual fund, which prices at the end of the day and cannot be traded during normal market hours. What has happened to passive investing since has been quite a big difference.
Close to half the passive space is now occupied by exchange-traded funds — ETFs, as they are known, which still mostly track indexes and carry much lower fees than most mutual funds. But they’re set apart by investors’ ability to trade them through the day, making them subject to the vagaries of intermarket moves and potential liquidity issues.
Bogle hated the idea.
He loathed it so much that he called people who dabble in ETFs “fruitcakes, nut cases and lunatic fringe.”
Eventually, the Vanguard Group, which Bogle founded, would cave and join the ETF craze after Bogle no longer had a leading role in the organization. Today, Vanguard’s $4.4 trillion in fund assets consists of $887 billion in ETFs, second in the $3.6 trillion industry only to BlackRock.
In his final days, though, Bogle still wasn’t convinced, addressing the issue in his final book, “Stay the Course, The Story of Vanguard and the Index Revolution” (Wiley, 2018).
He maintained that ETFs were mainly the purview of speculators with most of the “rapid trading” in ETFs “done by financial institutions that use them to hedge or equitize cash reserves.”
“The arithmetic suggests that only about one-sixth of ETF assets are held by investors with a focus largely on the long-term,” Bogle wrote, according to an advance copy provided to CNBC.
Still, he concluded the ETF chapter of his book by saying he supports the funds as long as they are broad-based and not used for speculation.
Despite his misgivings about the current state of the industry, Bogle remained a believer in index investing, and will be remembered as one of the true market pioneers.
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle,” Warren Buffett once said.
Bogle concluded his book with a valedictory that went beyond his beliefs in investing and stretched to his philosophy on life itself.
“I’ve usually used the phrase ‘stay the course’ as one of the great rules of investment success,” he wrote. “But as I complete this memoir, ‘stay the course’ is also a splendid rule for fighting our way through the inevitable ups and downs of the short spans of our existence on this Earth, and for enjoying a productive and honorable life well lived.