How ETF investors fare

By Felix Salmon
June 18, 2009

John Bogle’s mutual fund vs ETF analysis has now appeared, and it seems I was right: Bogle makes no attempt whatsoever to distinguish between buy-and-hold ETF investors, on the one hand, and ETF noise traders, on the other. (Or, to put it another way, he makes no attempt to restrict the ETF investors he’s looking at to those who would otherwise buy mutual funds.)

That said, Bogle’s analysis is pretty interesting — especially when he says that the average investor in Vanguard’s S&P 500 mutual fund actually outperforms the fund itself by 2.8 percentage points. Is that a result of dollar cost averaging, do you think?


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Felix, there is a index analytics that advises on capturing alpha over S&P (adds, deletes, and so forth; I know Lehman/Barclays had a thriving practice group in that) because the herd just follows after the fact and a lot of the index changes are pretty formulaic and to a degree predictable. That’s why they could outperform the underlying.

Posted by peatey | Report as abusive

Pay no attention to “investor returns”, it’s a completely bogus concept when applied to individual funds, especially market index funds.

Posted by Max | Report as abusive

DCA has really boosted my portfolio in the last year. The importance of DCA during a volatile market cannot be overstated. Even though the S&P is down ~40% this year, my overall portfolio is quite positive on account of my weekly purchases picking up a LOT of shares on the cheap during, e.g., March.

Posted by Logan Bowers | Report as abusive

Broad-market index funds/ETFs can outperform the underlying index by lending securities to short-sellers, since gains from this can outweigh their negligible trading costs. For example, Vanguard’s total stock market index has 7% turnover, and much of that can be handled either by trading with other Vanguard funds (or via ultra-low-cost dark pool transactions. Thus their trading costs are probably within spitting distance of zero, and most of what they call expenses has to do with account management (toll-free numbers, printing and postage costs, etc).

Posted by fred | Report as abusive