Is it just me, or has there been a series of articles specifically putting Vanguard in the crosshairs lately? Between this and the ridiculous attempt to blame Vanguard for being too efficient and charging too little in overhead, I'm starting to wonder if there's a specific campaign going on here.
Vanguard is definitely at the forefront of advocating "just put your money in an index fund and wait, don't try to time the market". There's a huge amount of money behind the alternative that will suffer if more people follow that advice. Media campaigns are, on that scale, relatively inexpensive.
In a recent Planet Money episode (#688: Brilliant vs. Boring), they talk about how when John Bogle first introduced the index mutual fund in 1975, it got a lot of criticism (and not much adoption) with people claiming that they were "un-american" and "Bogle's folly".
It's possible that there's some sort of concentrated media push going on here, but the story hasn't changed much in the last 40 years. And I would hope that if people with a lot of money were trying to smear index funds, they'd at least come up with a new angle.
> It's possible that there's some sort of concentrated media push going on here, but the story hasn't changed much in the last 40 years.
My opinion is that if there exists campaign against such investment strategies, then it is possible that this has been going on quite long time already. Like the parent postulated: media campaigns are, on that scale, relatively inexpensive.
His opinion iirc is that at some point there will be an inflection point where there will once again be profits to be had through information discovery, and the two forces will balance out.
He's also identified the narrative as a popular excuse among the poorest-performing hedge funds ("We valued the stocks properly, it is the market that is wrong." and "We aren't even trying to beat the market, we are merely offering a different risk proposition.") After over a decade of data, hedge funds must compete against the more compelling narrative, that hedge fund winning streaks are a matter of chance, and that the average investor isn't capable of picking one with prolonged better-than-market returns.
That is hard to prove, and is also not necessarily useful for anyone making a choice of where to invest, if the rare events are pretty unpredictable and "pretty hard to pull off" they may as well be treated as random by investors.
There clearly are strategies that make money at times. The majority off hedge funds do not offer these, and what they offer is hidden by their fees, which do not correspond to results, and even discourage good results as they encourage volatility.
Thank you. An important distinction. The same idea gets me going in discussions about turnover rates among football teams. (Teams tend to regress to the mean year-over-year in how often they fumble, so some writers insist fumbles are "caused" by chance.)
There are always profits, and losses, to be had through attempting to beat the market. The trick is whether anyone can consistently beat the market, time and time again, such that their long-term return reliably exceeds that of the market itself.
The point is is that it becomes easier to beat the market the more people are indexing. Thus there become more people consistently beating the market. Identification of such is still an issue, but not as difficult.
"Look more closely at those gaudy returns, however, and you may see something startling. The truth is that very few professional investors have actually managed to outperform the rising market consistently over those years. In fact, based on the updated findings and definitions of a particular study, it appears that no mutual fund managers have."
At this point, Mutual Funds are the bottom of the barrel with respect to attracting talent for active management. There are plenty of examples of active funds that have consistently beat the market.
ex: Since Horseman's inception in February 2001, the fund has achieved annualized returns of 14.79%, according to HSBC.
According to A Random Walk Down Wall Street, there are many examples of funds that have consistently beat the market over 5-10 years, but there are very few that outperform the market over a longer time horizon, and oftentimes they underperforming in the subsequent time periods (Peter Lynch's Magellan fund is the one counterexample given).
I'm as big a boglehead as there is. Nevertheless, imagine you're the only person in the world not indexing. It's going to be quite easy to beat the market. Everyone else in existence is using market cap as the sole criterion for determining where to put their money. In this case all the other indicators for success are being ignored and not priced into the current price of the stock. In other words, if the whole world indexes the market becomes very inefficient.
> There are always profits, and losses, to be had through attempting to beat the market.
In this context the problem is that buying into an index fund does beat the market, because it simultaneously creates and then takes advantage of a bubble in the price of stocks in the index. The price of indexed stocks goes up because index funds are buying them. Then people buy into index funds because they're going up.
In theory non-index investors will then sell the indexed stocks once they're overpriced, but they can see the feedback loop. If more people are expected to invest in index funds in the future then the future demand for indexed shares will be even higher and the indexed shares will be worth even more tomorrow, so they become part of the bubble instead of correcting it.
The article and discussion confound indexes with markets with sector investment strategies.
The SP500 is not the market or even a market, its a small sector selected by backwards view of the recent past top 500 large caps.
So buying an index fund that tracks SP500 means some churn as previously successful large companies are added, and recently unsuccessful large companies are removed.
A trivial example of SP500 beating the market (of all stocks) would be new regulations or whatever resulting in increased costs and harm to small cap stocks. Its not hard to imagine... a fixed cost of regulation that might shut down your local independent gas station might be a rounding error at BP. Imagine an accounting change that costs the same to implement no matter if you're talking about thousands or billions. Or PCI/DSS change. Anyway in that situation the small caps would drag down the market average but have no effect on the large caps in SP500, so the SP500 "would beat the market" easily.
Well you just turned the point from a financial to a semantic one.
What really is the market?
We could discuss it for hours, but the reality is that (US )"market" in finance does refer to the S&P500.
So "beating the market" always means beating the S&P500.
An index fund is not its index. The distinction is important because the latter does not include management fees, transaction costs, and financing. From here it's easy to see how an index fund might beat the market.
I agree and think the author doesn't provide a very critical look at the issue.
For one, he relies heavily on the expertise of a bank which is threatened by ETFs because it makes money in part by executing trading strategies to wealthy clients - very generally speaking, the more complex/active the trading, the more money the bank makes. Not that the Goldman guy is wrong, but the author should have acknowledged this conflict.
Also the idea that somehow the average person picking stocks can help make market efficient seems like a big stretch. It's really really hard to determine a fair price to pay for a stock. And anyway, there's an ENORMOUS amount of brainpower that already goes into outsmarting the rest of the market - probably more than ever - and it's that smart money that sets the price, for the most part.
The thing about vanguard charging too little in overhead wasn't at all ridiculous when you consider that vanguard is owned by the people that invest in its funds.
It might be wrong. It was surely a little bit weird and surprising.
It's still ridiculous. Yes, if Vanguard were owned by a different set of shareholders than those who buy into its funds, then there'd be an incentive to charge higher management fees. That doesn't make doing so "anticompetitive", though. It's anticompetitive to "dump" goods/services on a market at an unsustainably low cost to drive competitors out of business (and then presumably raise prices once you control the market). However, it's not anticompetitive to, by design, have a lower price than your competitors and keep it that way forever.
There's absolutely nothing wrong with setting up an organization owned by its shareholders and designed to not charge excessive fees. Resenting that and attacking Vanguard for it is an underhanded tactic by those who want to make money charging fees, and thus have trouble competing with Vanguard.
We were talking about two different issues, then. I was referring to the persistent complaints by Vanguard's competitors that their fee structure is "unreasonably" low, often with blustering about anticompetitiveness and "dumping". Those complaints have been floating around for years, and more instances of them arose recently as everyone scrambled to throw in their two cents on the tax lawsuit.
But yes, the tax charges weren't quite as "ridiculous" (in that they require more than a moment's thought to dismiss), though I still think they're completely baseless. (And also, "tax avoidance" is the perfectly legal and sensible practice of paying as little tax as possible; the allegations against Vanguard were of "tax evasion".)
While the details would need careful comparison to the various laws in question (which I would hope Vanguard has done), I would argue that Vanguard's structure is similar in principle to that of a cooperative. If you have an organization owned by its members, that organization serves only its members, and that organization charges lower prices because its structure makes it reasonable to operate at cost for the benefit of its members, then that organization will pay less tax because it takes in less revenue. And that's completely reasonable. It's not reasonable to argue that the organization should charge more to its members specifically so it can pay more tax. The same reasoning should apply to Vanguard, though how it may set up such a structure would require a great deal more care and complexity at larger scale.
The details of the complaint would require careful evaluation against the exact letter of the law; in particular, this isn't a comment on the separate allegation about the "contingency fund". The above is simply an argument that in principle, I don't see why this should apply to Vanguard when it doesn't apply to smaller-scale organizations operated for the sole benefit of their members.
I'm only familiar with the tax argument. It's standard-bearer is a former Vanguard employee and "whistleblower" who stands to make an enormous windfall finders-fee profit if the IRS ultimately agrees with him. (On the other side of the argument: "rules are rules, and Vanguard has to comply with all of them, even the dumb ones.")
Can you provide a link to the "dumping" argument, posed well, or by any credible market participant?
> I'm only familiar with the tax argument. It's standard-bearer is a former Vanguard employee and "whistleblower" who stands to make an enormous windfall finders-fee profit if the IRS ultimately agrees with him.
As far as I can tell, that case got dropped: http://articles.philly.com/2015-11-19/business/68386489_1_da... . Though it's still entirely possible that the IRS continues to pursue it separately (they haven't commented on the status of that), it no longer appears possible for the so-called "whistleblower" to pursue it directly or to collect.
> (On the other side of the argument: "rules are rules, and Vanguard has to comply with all of them, even the dumb ones.")
Granted; it's possible there's a "letter of the law" problem here, hence my comment that the tax argument isn't quite as ridiculous. However, in terms of actual justice being served, I don't think it's reasonable for an argument along these lines to apply to Vanguard but not to any random local co-op that serves its members. (I'm ignoring the second half of the complaint here about the "contingency fund", and focusing on the "not charging enough" argument, which seems far more obviously wrong in principle.)
The difference, as far as I can tell, is that co-ops have just the one legal entity owned by the individual members, whereas Vanguard involves a second corporate legal entity, due to the nature of how the funds own Vanguard; it's the same logical structure, but the legal entity topology differs, and that may make a difference. As far as I can tell, the laws trying to say "must charge market rates" (because charging less would mean paying less tax, and we can't have that...) refer to B2B transactions, not B2C transactions. I wonder why Vanguard structures its funds using two legal entities in this way, rather than a single legal entity directly owned by the funds it itself manages?
> Can you provide a link to the "dumping" argument, posed well, or by any credible market participant?
I can't seem to find a good isntance of it at the moment. I saw a few more recent instances of it in stories associated with the tax lawsuit, mentioned by random other fund representatives commenting on the suit. They struck me as the kind of comment made offhand, rather than a careful legal argument of any kind; however, I've seen that complaint in various contexts ever since I started following (and using) Vanguard myself, before I'd heard about the lawsuit.
The end of http://www.bloombergview.com/articles/2016-02-10/vanguard-is... makes a comparison between Vanguard's low fees and Costco members; that comparison isn't quite as accurate, since Costco charges its members a fee rather than being owned by its members, but it seems like the right line of reasoning at least.
Do they charge too little though? The list of cheapest ETFs is far from being completely dominated by Vanguard http://etfdb.com/compare/lowest-expense-ratio/ Schwab makes a point to undercut Vanguard on everything, and iShares joined the game recently with its "core" ETFs.
My favorite (obliquely) anti-Vanguard argument is the "research" that goes around every few years purporting to demonstrate that a few companies "control everything":
Vanguard is definitely at the forefront of advocating "just put your money in an index fund and wait, don't try to time the market". There's a huge amount of money behind the alternative that will suffer if more people follow that advice. Media campaigns are, on that scale, relatively inexpensive.