Bogle Says Index Investing Is No Threat to Market Efficiency

(Bloomberg) -- Vanguard Group founder Jack Bogle said index investing would have to get much larger than it is today before threatening the workings of the financial markets.

“The issue is at what point is indexing making the market less efficient,” said Bogle, 87, in an interview Friday on Bloomberg Television. Indexing, which now controls about 30 percent of the market, “could get to 50 or 60 percent before anything would be noticed.”

Bogle Says Index Investing Is No Threat to Market Efficiency

Vanguard Group founder Jack Bogle dismisses critics of indexing on “Bloomberg Markets.”

(Source: Bloomberg)

Critics of indexing, including the authors of a recent report by analysts at Sanford C. Bernstein & Co., contend that as indexing grows, markets will no longer price securities appropriately or allocate capital efficiently. In a note titled “The Silent Road to Serfdom: Why Passive Investing Is Worse Than Marxism,” the authors said passive indexing is worse than being in a “centrally planned economy.”

Bogle called the report “idiotic, totally wrongheaded and terribly flawed.” Indexing has created great value, saving investors perhaps more than $1 trillion over the past 40 years, he said.

Investors have been plowing money into mutual funds and exchange-traded funds that mimic indexes and shunning funds whose managers pick stocks and bonds. In the 12 months ended July 31, investors added $401 billion to passive vehicles and pulled $328 billion from active funds, according to data from Chicago-based Morningstar Inc.

While Vanguard is the second-largest seller of ETFs in the U.S., the market is dominated by traders, he said.

“In the long run, traders are a gift to Wall Street, and by definition, not a gift to investors doing the trading,” he said.

Bogle started the indexing revolution for retail investors in 1976 when he launched the Vanguard 500 Index Fund. The fund, which just passed its 40th anniversary, had $205 billion in assets as of Aug. 31.