In the normal course of business, that is a question we have asked ourselves more than once at Dow Jones Indexes. We doubt we are alone.
Simply framing the question this way respectfully acknowledges the man who has come to define—some would even say helped create—the modern indexing business. His early insights and commitment to practice his own preachings have led to the creation of innumerable indexes over the past few decades. Even The Dow and its sister Averages, which date back 118 years, are indirect beneficiaries of his message through the dramatic growth in index investing.
Mr. Bogle’s decades-long proselytizing efforts played a significant role in channeling trillions of investment dollars into index-based vehicles, including thousands of ETFs and ETPs used by investors around the world. That’s a humbling feat for any observer, ourselves included, and we’d be remiss if we did not give credit where it is due and acknowledge his contributions.
But much has changed in those same decades, and the terms “index” and “indexing” are no exceptions. The index universe has exploded in breadth and depth, and any current conversation that includes those words often requires context and clarification—even among industry professionals.
In fact, explanations of rule-making and methodologies, as well as a detailed look under the hood at selection processes, stock screens and trading dynamics, are now the “new normal.”
Perhaps even more relevant is to remember that Mr. Bogle’s message about indexes and indexing is not an end in itself. He does not advocate indexing for indexing’s sake: Index-based investing does not guarantee outperformance, merely an investment that approximates the returns of the underlying index, less costs.
In Mr. Bogle’s view, while there are many variables to consider when making investment decisions, the focus on indexing is the economically rational conclusion for any investor who understands the practical considerations—read: high costs—of the investment world.
These, of course, can include advisory fees and commissions, which may be 1-2 percent for managed assets; undisciplined buy/sell decisions; taxes on high-turnover strategies; and outright underperformance of active funds when compared to the broad market. If bought and held for the long term, the use of indexes can limit the portfolio drag associated with these costs.
An Industry Evolves
However, not all market participants who have accepted many of the premises of traditional index-based investing as conceived of by John Bogle subscribe to every aspect of his thesis. His belief in a total-market approach is viewed as too sweeping and lacking in nuance by many, and the indexing industry has responded to investor demand with indexes that target particular asset classes, geographies and characteristics—or combinations thereof.
Dividend investing, which has been around as long as dividends have been paid, offers an excellent example of the evolution that has taken place. The earliest commercial dividend indexes were launched more than 10 years ago. At that time, they were straightforward and largely consistent with the traditional objectives of dividend investors.
Since then, though, the portfolio of available dividend indexes incorporates a much wider array of possibilities to meet investor demand: more country and regional markets; more varied dividend considerations, such as employing different payout histories or growth-rate calculations; and, most recently, taking into account a company’s fundamentals to strengthen the nondividend portion of the index’s total return.
Costs and turnover have grown along with the menu, reducing the typical investor’s ability to easily understand the drivers of investment performance. For example, there are approximately two dozen dividend-themed, U.S.-listed ETFs with nearly $25 billion AUM covering markets around the world.
So … WWJBD? Is the current state of the market a testament to his message, or have the barbarians stormed the gate?
We can't speak for him, of course, but we'd guess that he views the current state of the index market as more burden than blessing for investors.