An interesting couple of comments popped up on a post at Seeking Alpha by Felix Salmon about recent comments from Jack Bogle about ETFs. One reader said about actively managed funds “And where were the fund managers whom I’d counted on to protect my capital and outperform the market?” Ron Rowland (keeper of the ETF Deathwatch) correctly set him straight.
This is an education issue that I have touched on before. When an investor buys an actively managed mutual fund or goes through a broker who hires managers, in both instances the managers must assume that the asset allocation decisions have been made. It is right and reasonable for a small cap manager in the context above to be more than 97% invested at all times. A small cap fund needs to be a proxy for small cap stocks regardless of the direction and magnitude those stocks take. Fund managers and managers of separate accounts in brokerage house programs are not asset allocators that falls on you or your broker.
That sort of ignorance is disappointing, disheartening but also a learning opportunity. It is a reminder that people very often invest in things they do not quite understand. This applies to do-it-yourselfers in their 401Ks all the way through to “sophisticated” pools of capital buying some sort of mortgage debt that turned out to be toxic.
As for Bogle’s assertion that ETF investors are getting killed, I find it is useless. I’ll leave questioning of the data to Felix and just say that human behavior causes investors to lag mutual funds. This has been the case for ages (always?) and so if true of ETFs, is no different than any other sort of fund. People get killed in treasuries occasionally too. The price of any asset can go down a lot and the human response to that could compound that problem, ditto buying high.
I would think that if you asked indexers who have hung on all they way through this and rebalanced at whatever interval Bogle would think prudent many of them would say they have been killed in this market. Bogle has admitted in past TV appearances that it is the behavior, as opposed to the product, that causes the most problems for people yet he continues to rail against the products. One quote from him “…you’re talking about 18% of investor capital that’s been lost by all this trading.” So people may be bad traders, what does that have to do with ETFs? Bad traders have been around longer than Bogle has. If they get rid of all the ETFs today bad traders will have figured out how to lose money with other tools by the open tomorrow.