Vanguard's [profile] Jack Bogle isn't going to take a knock on passive investing lying down.

He wrote a column for Financial Times challenging fund manager David Smith's claim that "passive parasites do not cure all financial ills."

Bogle said of passive funds' advantages, "Every investor must keep in mind this elegantly simple formula: gross market return minus costs equals net investor return."

He took on Smith's assertion that index funds take advantage of market inefficiencies created by active managers and traders, saying confidence in index funds is based on "efficient market hypothesis."

Bogle says the issue has nothing to do market inefficiencies because the cost hypothesis is the only issue that matters, since gross return in the market taking away the costs of getting said return equals the net return investors receive. Who is the parasite then?

Bogle says it's the active manager. "If we assume a real stock market return of say, 4.5 percent, the active parasite consumers 50 percent od that return; the passive index fund consumes less than 2 percent, a 25-fold difference…So when an active manager decries the passive index fund as a parasite, he might look first at his peers, enormous parasites with their fees and transactions costs eating his returns earned by the ultimate host: public corporations."

To read more, click here.  

Edited by: Casey Quinlan


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