Are ETFs Un-American?

It looks like Warren Buffett and John Bogle both prefer a traditional index mutual fund over exchange traded funds (ETFs). Although Buffett has nothing against ETFs, he just feels there is less temptation to continuously trade and get into trouble with mutual funds. John Spence reports there is an implication investors try to performance chase much to their own demise. Buffett embraces the idea of investing in index funds and doing so regularly; "people ought to sit back and relax and keep accumulating over time." Buying a regular index fund, and continuing to do so over time will ensure you don't buy at the top nor will you buy at the bottom. He believes when investing in a mutual fund, you're buying into a wonderful industry, American industry.

Does that imply ETFs are un-American? We've heard these rumblings from Mr. Bogle, but I'm a little surprised to see Mr. Buffett sharing similar thoughts. The advantages of ETFs over mutual funds are overwhelming. I'm surprised these distinguished gentlemen think little enough of the average investor. Discouraging investors to stay away from ETFs because they might entice trading or speculative investing is like warning people to stay away from doctors because you might get a needle in the eye. Investors don't need ETFs if they are looking for an investment to shoot themselves in the foot. There are plenty of hyped stocks and over-marketed actively managed mutual funds that would do a much better job.

Comments

[Panskeptic:]

I don't think either gentleman really thinks about the average investor.

Bogle is desperately trying to salvage his legacy while the parade moves on. His clock stopped a long time ago. Buffett may often have his heart in the right place, but he buys companies for investments, not mutual funds or ETFs.

Why should we care what either one thinks? The ETF stampede won't rise or fall on the approval of Bogle or Buffett, or the Weeping Willies over at Morningstar for that matter.

2007 May 11 07:06 AM

[Internet2k4:]

A lot depends on what one thinks of dollar cost averaging for the ordinary investor and for what purposes. I favor DCA for broad market holdings like SPY, EFA and VWO as opposed to market timing sector or commodity ETFs. For the core index holdings I've adopted the approach of monthly contributions to mutual funds, which can be sold in order to buy the corresponding ETF every year or so. This reduces ETF transaction costs which prevent DCA as well as the long term cost of holdinng mutual funds with higher MERs.

2007 May 11 08:12 AM

[Malkiel:]

At the root of this thinking is the ingrained belief that amateur investors will always fail to time their purchases and sales, causing them to experience loss. But in the new era of automated trading and client software trading platforms it is becoming almost effortless to automate effective timing strategies that capture the best part of a move or cut short big losses. ETF's are an integral tool in using automated strategies, which I'm sure these gentlemen despise and mistrust, but the mathematical advantages of market timing are too great to ignore and the small investor will rule the roost when the fundamentals of using automation become widely understood...

2007 May 11 10:44 AM

[Boubou:]

I find Buffet's remarks patronising in the exterme. Whle the average investor is not Warren Buffet, he doses not need to be protected from his own exuberance by clumsy investment vehicles with high costs.

2007 May 11 11:24 AM

[Tom Lydon:]

All excellent comments. The media is a little to blame here too. We get calls from several reporters a week covering the ETF marketplace. Unfortunately, many continue to ask if there are too many ETFs and the small sector ETFs really appropriate for individual investors. This eventually leads to a ETF 101 discussion outlining the benefits of ETFs and highlighting which group of ETFs command the majority of the assets. I suppose it's just another sign that ETFs are still in their infancy if most financial reporters still don't get it.

2007 May 11 04:50 PM