Which ETFs are better vanguards or fidelitys
The ETF critic Jack Bogle was wrong here
How index investments came about in the USA
The concept of the mutual fund was conceived by the trust departments of banks and partnered asset managers in the USA as convenient packaging for securities. They were intended for long-term customers. The early funds were low cost and sparingly shifted their portfolios. The holding periods of these vehicles were measured in decades. The fund pioneers saw themselves primarily as guardians of the interests of their partners and shareholders.
This was the relatively idyllic picture when Bogle first studied fund management as a student at Princeton. Over time, however, he claimed, the industry's self-image eroded as its success attracted nontraditional players with other things on their minds. Running funds was less about building strong relationships with customers than about increasing annual cash flow for the new generation of money managers, according to Bogle. The Wall Street brokers, in particular, were a horror to Bogle. (They have long since disappeared today.)
Bogle lay down sideways
In the 1980s, the idea of listing securities on the stock exchange in bundled form arose. The first ETFs were created by an exchange to compete with the futures exchanges. The American Stock Exchange launched a forerunner of ETFs in 1989. This product was soon cashed out by court order - the Chicago Mercantile Exchange had sued, arguing that AMEX's product was too much like a futures contract. The following year, the Toronto Stock Exchange launched a better-designed ETF, and the US followed suit in 1993 with the SPDR S&P 500 ETF.
And what about Bogle? Apparently he didn't like the birthplace of the ETFs or all the accompanying circumstances. The underlying investment seemed fine as it was indistinguishable from index mutual funds, but the motivation was terrible in his opinion. Trying to get trades out of futures exchanges with an investment vehicle that would increase the trading volume of an exchange? It couldn't possibly be good for investors! According to Bogle, ETFs would transfer assets from investors to the stock exchanges. Since every dollar that investors wasted on trading transactions would flow into the pockets of the stock exchanges, this was taboo for the index fund old master!
Constantly better conditions for investors - not in spite of, but because of ETFs
With regard to the assessment that the traditional self-image of the fund providers of the fiduciary money manager must endure, Bogle was correct. He viewed Fidelity, American Funds, and T. Rowe Price as legitimate competitors for Vanguard thirty years ago because of their backgrounds.
But Bogle was wrong about ETFs and has never revised his views. Of course, short-term traders also use ETFs, but also a very large layer of investors and advisors. Bogle didn't want to acknowledge that ETFs played a prominent role in breaking down sales barriers and changing investment culture.
For consultants in the US who were registered on a few distribution platforms, ETFs were a good solution because they were publicly available due to their listing on the stock exchange. They gave them a wider range of products. ETFs have thus become an integral part of advisory models.
Private investors, on the other hand, were no longer forced to shell out high costs in order to get funds. As a reminder: Even with conventional index funds, there were sometimes high front-end loads.
So ETFs have expanded the investment options for private investors. And by the way, they are constantly expanding them today. Dimensional Fund Advisors (DFA), for example, the fifth largest provider of investment funds in the USA, recently announced that it would add three ETFs to its funds, which were previously only accessible through advisors. Private investors will therefore have the opportunity to invest directly in DFA portfolios - if they so wish.
This is an extremely positive trend. From an investor's point of view, fund companies should not prosper or fail because of their distribution models. What matters is how they treat their investors. Ironically, ETFs are closer to fulfilling Jack Bogle's vision than the fund industry. Bogle insisted that ultimately it would be less the form of distribution than the quality of the funds that would be decisive. He was right in making that prediction - but he failed to see that ETFs would be his allies in this endeavor - not his adversaries.
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