When is a Door not a Door?

Bill Byrnes — Wed, 25 Apr 2007 13:10:00 -0500

When it’s an Exchange Traded Fund (ETF), according to John Bogle. Mr. Bogle is the founder of the Vanguard funds and a champion of low-fee and index funds. He’s one of those people who’ve forgotten more about mutual funds then I’ll ever know.

An ETF is supposed to be similar to an index fund. ETFs and index funds are market baskets of securities designed to track the performance of a market index, such as the S&P 500. (Proponents argue that ETFs can have lower costs, greater liquidity, and be more tax efficient then index funds.)

In Mr. Bogle’s just-published book The Little Book of Common Sense Investing he argues that ETFs have been hijacked by day traders and that many ETFs will not track the indexes they’re designed to mimic and will not meet investors expectations. You can find a summary of his arguments in the April 30 BusinessWeek article What’s Wrong With ETFs? (Yes, I know it’s April 25^th, but publishers seem to be able to foretell the future. As an investor, I wish I could do this.) He’s not alone in expressing concern about ETFs. Two articles which discuss the potential pitfalls of ETFs are Beware the Flaws in Trading ETFs in The Street and Too Many ETFs in Forbes, both published March 20^th.

Are all ETFs bad? Of course not. Are they a viable substitute for index funds? Yes, the well-structured liquid ETFs are. Even Vanguard evidently does not entirely agree with its founder. It offers over 30 ETFs. Hopefully, Mr. Bogle would find Vanguard’s ETFs to be in the good category.

ETFs are like any other investment. You can’t just go by the name, you’ve got to open the door, dig around and reach your own conclusion if it is what it says it is and if it’s right for you.

The MUTUALdecision Blog: When is a Door not a Door?

When is a Door not a Door?