Investors should avoid a new generation of rip-off ETFs

JOHN Bogle, founder of the Vanguard Group and pioneer of index funds, may have saved investors more money than anyone else in history. By some estimates, his crusade to drive down fees has, over the past five decades, left them with more than US$1 trillion that would otherwise have gone to fund managers.

Index funds, through which speculators can invest in the stock market as a whole, cut out the middlemen. In doing so, they have transformed the world of investing. But when it came to exchange-traded funds (ETFs), the investment vehicle through which people commonly invest in index funds, Bogle was sceptical.

The first ETFs were launched in 1990, a decade-and-a-half after Bogle’s first passive mutual fund. They came with the ability to buy and sell shares instantaneously. To the godfather of passive investing, minute-by-minute trading made them a “wolf in sheep’s clothing”. He believed they would become a vehicle for speculation and chasing market fads, rather than long-term investment.