What the Investing Legends Have to Say About ETFs

Vanguard founder John Bogle and Berkshire Hathaway Chairman Warren Buffett have both recently emerged to criticize exchange traded funds (ETFs).

Buffett's concern is that perhaps traditional mutual funds are better for investors, since they lessen the chance for frequen trading. The Bogle released the results of his study of investor behavior at a webinar hosted by Index Universe.

His findings weren't great: comparing the returns of 79 ETFs in a variety of major asset categories over the last five years to the returns of the average dollar invested in those ETFs over the same timeframe. Of the 79 ETFs, 68 had investor returns short of the returns earned by the funds themselves.

I have great respect for Bogle and Buffett. They're legends in investing and they've made significant contributions in that area over the years. But the principles that they stand for - value, service and choice - are completely embodied by ETFs.

Both Bogle and Buffett need to embrace innovation. Criticizing ETFs because some investors misuse them or get hurt by them is like criticizing cars because some people crash them. The majority of investors are incredibly knowledgeable, responsible and careful with their investing. It isn't fair to paint them all with the same brush.

Their criticism of ETFs seems a little self-serving. After all, perhaps those who have been able to maximize the benefits of these funds may no longer need Bogle's and Buffett's sage advice.

To fight ETFs is a losing battle, because investors are better served in a way they haven't been now that ETFs are in existence. They're realizing it, too, if the flow of assets out of mutual funds is any indication.

If Bogle and Buffett are really looking out for the average investor, perhaps a better battle to take on might be the 401(k) industry. There's way more damage being done to Americans in that area than any ETF could inflict.