Tags: Bogle | Private | Commodity | ETFs

Bogle: Private Commodity ETFs Are Risky

Monday, 10 Oct 2011 07:41 AM

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Vanguard founder Jack Bogle says there’s a good possibility that private commodity exchange-traded funds (ETFs) couldn’t deliver the underlying physical commodities if their investors demanded they do so.

“The commodities part of the public ETF market is not that large,” Bogle told CNBC. “It's only a small portion of the public market.”

“When you get over into the private side, individual ETF commodity pools, there’s a huge risk of that. Nobody knows how big ut is because you don’t have disclosure.”

Which is why Kyle Bass and other hedge fund managers have eschewed gold ETFs in favor of buying physical gold.

ETFs are “the major speculative force in the financial markets today ...and the most active stocks on the New York stock exchange by far,” says Bogle. “We now have a VIX (volatility index) ETF, which enables people to speculate on their speculation.”

Bogle says investors need disclosure from these funds about what their fund returns earn and what their investors earn.

Investors do very badly, says Bogle, adding that while Blackrock—which is the largest purveyor of private ETFs—is not engaged in double or triple leverage, it is engaged in a lot of individual country funds.

“Over the last decade these individual country funds have averaged a 10 percent return, but the investors in them have averaged a 4 percent return.”

“They shouldn't be bragging about their returns when they know it's basically like giving a behavioral toy to tempt investors.”

Index Universe reports that more than $2 billion flowed into U.S. ETFs, and total assets rose to $987.28 billion from $967.07 billion last week.

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