Actively managed mutual funds have “no place” in investors' portfolios, asserts Jack Bogle, co-founder of Vanguard.
Besides having too many costs, they've become so big they cannot beat the market, Bogle, known as the father index funds, told CNBC.
"They lag the market because they have to," Bogle said. "These pools of capital and mutual funds and their related pension funds have gotten so huge — 50 to 55 percent of the market — they can't outperform each other."
Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.
Their performance is average before costs and below average after costs.
"These costs are very high. Higher than people expect," he said. Besides management and operating costs, they have costs for trading, which is more for speculation than investment. "Some of these portfolios trade over 100 percent a year."
Over the last five years, over 65 percent of actively managed large cap funds have lagged the Standard & Poor’s 500. Investors withdrew $119 billion from actively managed funds and sent $30 billion into stock exchange-traded funds (ETFs) last year.
"What we're seeing now, finally after all these years, is the real triumph of indexing," Bogle said.
Still, the ETF boom is overdone, he cautioned. "There a whole bunch of nutcase ETFs out there. It's the hottest marketing idea of the 21st century, and a lot of people jump on the bandwagon."
Some managers do outperform the market.
"If you think you can pick a good manager, go try," Bogle says, but notes that “in reality, I have to say there is no place” for actively managed funds in an individual investor’s portfolio.
However, history shows that the best funds peak relative to the market, then fall as money pours in, he warns. "Investors, in many respects, are their own worst enemy."
The trend to low-cost ETFs will probably continue, as investors lose faith in the ability of actively managed funds to justify their higher costs, experts told The Wall Street Journal.
"ETFs have really won people over," Deborah Fuhr, a partner at ETF research firm ETFGI, told The Journal.
Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.
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