A candid chat with Jack Bogle, founder of the Vanguard Group and crusader for low mutual fund fees for 65 years, reveals his take on exchanged-traded funds, smart beta, the Department of Labor's fiduciary rule, and why the mutual fund industry needs to change.
InvestmentNews: You were not happy with exchange-traded funds when they first came out. Are you still unhappy with them?
Mr. Bogle: It's just the way I was at the beginning. My thesis is that ETFs are fine as long as you don't trade them. As long as they're not traded, they can be more convenient for some people. The problem with some ETFs is how weird they are. The Securities and Exchange Commission is looking at triple leveraged funds — they just make no sense at all. Single-country funds are too risky, too specialized. Vanguard stayed in the mainstream.
InvestmentNews: What do you think of smart beta?
Mr. Bogle: I can't believe you asked me that. (Rob) Arnott had 10 years to prove it. He failed. (Jeremy) Siegal had nine years. He's failed. I gave a speech to some quantitative analysts called “David and Goliath: Who Wins the Quantitative Battle?” Goliath is the algorithmic and David is the arithmetic. (In the speech before the Institute of Quantitative Finance on April 18, Mr. Bogle argued that smart beta funds — the algorithmic — often increase risk, or costs, or both). Return minus costs is what investors get, and there's no way around that — none, nada, nil.
InvestmentNews: How did you feel about the Department of Labor's fiduciary rule for retirement accounts?
Mr. Bogle: I was very pleased. I've been talking about the fiduciary responsibility since my senior college thesis. Outside ownership of mutual funds is the real problem. They're trying to earn a return on their capital instead of yours.
InvestmentNews: If you could be king of the mutual fund industry for a day — not that you're not — what would you change about the industry?
Mr. Bogle: I have a lover's quarrel with the mutual fund industry. I'd change the structure — have them live up to the name and be mutual and be more honest in their disclosures. Cost makes the difference — and we haven't even talked about inflation and taxes. Most funds are tremendously tax-inefficient. The reality is that most people don't realize the tremendous drag of costs and taxes. Nowadays you hear a lot about costs but nothing about taxes.
InvestmentNews: What's the most recent non-investment book you've read?
Mr. Bogle: The Bully Pulpit: Theodore Roosevelt, William Howard Taft, and the Golden Age of Journalism, by Doris Kearns Goodwin. I wrote a junior paper in college on the muckrakers.