Jack Bogle

John Authers

Quite a few people seem to dislike a column I wrote earlier this week on exchange-traded funds and their role in the emerging market sell-off. So let me offer a little extra data that was not in the earlier piece.

The following chart, compiled from Strategic Insight Simfund data, shows total inflows and outflows from US investors to emerging market equity funds of three types: active funds, indexed open-ended funds, and indexed ETFs. Figures are in billions of dollars. Starting in 2009, when emerging markets began their rebound, and going through to the final quarter of last year, I believe the story it tells could not be much clearer: ETF money is flighty.

Money in ETFs is far more volatile and far more prone to exit in a hurry than money invested in emerging markets through other vehicles. As EM investing is supposed to be a game for the long term, this is a problem. Read more

John Authers

Active investment still has some active defenders, at least in the UK, to judge by the reaction to a recent Long View on the subject. And digging into the reasons for active funds’ persistent problems, it is easy to see why. Despite the claims of the Efficient Market Hypothesis (EMH) that it is impossible to beat the market other than by luck, it appears that an impressive number of managers do achieve the feat.

The problem is that they do not manage to beat the index by enough to be able to pay themselves and still pass on a decent performance to their clients. In other words, to quote Jack Bogle, the founder of Vanguard and the spiritual father of index investing, the case for passive investing rests on the CMH (Cost Matters Hypothesis), not the EMH. Read more