Wednesday, January 11, 2012

Vanguards ETF Infatuation

    Managed money is dead.  At least that seemed to be Jack Bogle’s (the founder of the Vanguard Group) message throughout the last decade.  “Buy the S&P 500 Index” was his message; that was until the index finished the last decade down 9.1%.  I watched many interviews with Bogle in 2010 and early 2011 and it’s funny he didn’t seem to pound the S&P 500 table like he had in previous interviews.
    Vanguard, these days, has turned much of its attention to promoting their ETFs. My question is why?  How would you feel if you were a fund manager at Vanguard and your founder is constantly on the circuit telling investors they should just buy an index because managed money does not work?  Please keep in mind that there is a gain with this promotion.  The largest funds (by assets) at Vanguard are all index funds.  These funds have become Vanguards profit center.  What happened to the foundation of managing money that Vanguard was built on?
    There are active fund managers at Vanguard doing a very good job.  Since Bogle does not like to point this out, I thought I would with some comparisons between these fund managers and their ETF counterpart.  After you see the data it should make you question why they are not receiving more attention.  I simply compared a specific Vanguard managed mutual fund to a Vanguard offered ETF (from the ETFs inception date to 1-10-12) on an asset class to asset class basis.  Here are the return results:
Large Cap Value (ETF Inception Date 1-26-04)
Vanguard Wellington Fund (VWELX) +61.60%
Vanguard Value ETF (VTV) +33.68%
Large Cap Growth (ETF Inception Date 1-26-04)
Vanguard PrimeCap Fund (VPMCX) +57.42%
Vanguard Growth ETF (VUG) +37.54%
Mid Cap Growth (ETF Inception Date 8-17-06)
Vanguard Mid Cap Growth Fund (VMGRX) +34.74%
Vanguard Mid-Cap Growth ETF (VOT) +23.73%
Mid Cap Value (ETF Inception Date 8-17-06)
Vanguard Select Value Fund (VASVX) +22.31%
Vanguard Mid-Cap Value ETF (VOE) +16.75%
Health Care (ETF Inception Date 1-26-04)
Vanguard Health Care Fund (VGHCX) +67.14%
Vanguard Health Care ETF (VHT) +38.74%
    Morningstar recently reported that the average non-leveraged ETF is held for 16 days.  16 days?  Is that what Bogle envisioned many years ago?  I used to have a tremendous amount of respect for Bogle, but in my eyes he has done nothing but try to sell the market what it wants and he has turned his back on managing money.  It’s a shame because as you can see by the data, he has some active fund managers doing a fine job vs. the ETF garbage that is now the hot ticket item of the day.  Being that the S&P 500 index finished 2011 with a gain of 2.11%, which was mostly driven by dividend payers, I am sure we will see Bogle once again turn his attention towards promoting the index.  After all the S&P 500 index fund at Vanguard has slipped to being its 3rd largest fund on the books, and we can’t have that.

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”