John Bogle’s presentation from Grant’s Spring Conference titled, “Resolved: The cost of investing is the determining factor in the success of investing.”
The Low-Cost Proposition
1. Gross Market Return: Shared by Investors as a Group—“Zero-Sum Game”
2. Costs of Investing: A) Shared by Active Investors—High (2%) B) Shared by Index Investors—Low (0.05%)
3. Therefore: Low-Cost Investors Must Earn Higher Net Returns.
Q.E.D.
The Cost Matters Hypothesis
U.S. Equities Managed by Mutual Funds and Institutional Investors
Indexing Market Share
Index Strategies as a Percentage of Total U.S. Institutional Equity Assets
U.S. Equity Fund Cumulative Net Cash Flow, 2006-2014 Passive Index Funds versus Actively Managed Funds
Cumulative Net Cash Flow into Index and Active Mutual Funds and ETFs
Adoption of a Great Idea
Market Penetration Rates
Popularity of S&P 500 Index Overrated
Adjusted for holdings of institutional and individual traders, only $1.1 T of index funds are held in broad-based portfolios by long-term investors.
John Bogle: The Original Index Fund vs. ETFs
First Index Fund (1974)
- Own the U.S. stock market
- Diversify to the Nth degree
- Minimize transaction costs
- Tiny expense ratio—500 Index: 0.05% (Admiral)
- Bought to be held—“forever”
Exchange-Traded Index Funds
- Pick your own index (1,100 now available)
- Diversify within sector you chose
- Lower expenses … but not too low (0.50%)
- Bought to be traded (average annual turnover of large ETFs: 1244%)
See full PDF below.
