In last years 40th anniversary issue of the
Journal of Portfolio Management,
John (Jack) Bogle recounts how he founded Vanguard Group
and the ubiquitous index strategy now synonymous with the $3
trillion firm. His inspiration: a 1974 paper by Nobel economic
sciences laureate Paul Samuelson in the first issue of
JPM, Institutional Investors sister
publication, outlining a fund that would track the S&P 500
index. Bogle launched Valley Forge, Pennsylvaniabased
Vanguard the following year; he retired as CEO in 1996 and is
now president of the Bogle Financial Markets Research Center,
where he does research on behalf of investors.
The index idea caught on: In 2014 active U.S. equity funds
had outflows for ten consecutive months through December,
reports Chicago-based Morningstar; passive U.S. equity funds
saw inflows for 11 straight months. Vanguard was the winner
among passive-fund firms.
Among the changes since the early days of index investing is
the proliferation of exchange-traded
funds. Active managers are fighting back with so-called
smart beta products, which use new indexes built around factors
such as value and growth. Senior Writer Julie Segal talked to
Bogle, 85, about the passive craze, ETFs and the future of
1 Investors are sending massive amounts of money to
index funds. Have they finally gotten your message, or is
something else going on?
Weve been through ups and downs, and weve seen
actively managed funds come and go in terms of performance.
Nothing lasts forever. While its hard to understand
reversion to the mean and that past is not prologue in this
business, investors do finally get the value of indexing from
their own personal experience in the markets. I get letters all
the time from people thanking me for how theyve done.
You should know Im now over $1 million or $3
million, they write. More than anything, its the
experience of investors and the power and logic of my ideas,
which arent world-shaking. Its gross return minus
costs equals net returns.
2 Exchange-traded funds make up a big part of the
flows into passive. Have you changed your views on
No. Ive often said the ETF is the greatest marketing
idea so far in the 21st century; I doubt its the greatest
investment idea. ETFs are fine if you dont trade them;
and if you dont trade, you might as well own the regular
fund. Were indifferent at Vanguard. We have the exact
same portfolio available in different packages; ETFs or regular
funds. Look, Ive had to invent my own word now: a
traditional index fund, to differentiate it from the ETF.
Dividend reinvestment and other things are cleaner with the