John Bogle: ETF speculation 'insane' for longer-term investors

Speculating through exchange-traded funds isn't prudent for longer-term investors, according to John C. Bogle, who created the first index mutual fund in 1975. While buying and holding a market-based ETF is an “intelligent” strategy, speculating through ETFs may mean trouble, Bogle, 81, said in a radio interview today with Tom Keene on “Bloomberg Surveillance.” “You're talking about trading, speculating,” said Bogle, founder of Vanguard Group Inc., the second-largest mutual fund company after Fidelity Investments. “But that's just an insane way to invest.” State Street Corp.'s SPDR S&P 500 Trust, also known as Spiders, has a turnover of 10,000 percent annually, compared with a “normal” turnover of 5 percent for the average investor, according to Bogle. Turnover is defined as the percentage of assets bought and sold in a year. The ETF was invented more than 20 years ago as a simple mutual fund that trades on bourses like a stock. Fund providers are now unleashing a new breed of “extreme ETFs” that use short selling, leverage and derivatives to capture a larger share of investor assets. “I wouldn't ban them, but I also wouldn't let them claim they're actually doing what they say,” said Bogle, criticizing three-times ETFs as not necessarily returning triple the gains of the indexes they purport to track. “They don't seem to operate the way they say they operate.” On March 25, the Securities and Exchange Commission announced it was deferring approval of new ETFs that make significant use of derivatives as the agency's staff reviews whether fund managers are stuffing too much leverage and complexity into offerings aimed at individual investors. Even so, the government shouldn't shield investors from dumb decisions, according to Bogle. “Only a fool would do that kind of thing in my opinion, but I don't think we should have the government Big Brother saying we're going to protect you from your own stupidity,” Bogle said. “That would take more government than we have today, which is saying something.”