ETFs, No Load Mutual Funds And Indexing: The Battle Of The Giants

I read a great interview, better referred to as a muscle flexing contest, between some of the titans of the mutual fund industry. In one corner, we have John Bogle, founder of the Vanguard Group and pioneer of index fund investing.

In the other corner sits Jeremy Siegel, professor and author, who has reinvented indexing with his company, Wisdom Tree, which indexes funds according to earnings or dividends rather than market capitalization.

“The great debate over index funds” illustrates heated arguments from both sides supporting their view. Even though it’s a written interview, you can detect the cold undertones and total disagreement about their respective investment approaches.

I am a pragmatic person and like to apply some numbers to these arguments as to which type of indexing, if any, works better. Let’s look at a comparison of these 2 views during a time when the dangers were greatest to your portfolio—the last bear market.

For this scenario, I wanted to find out how a plain index, such as the S&P; 500, had performed compared to a high dividend paying instrument, such as a Closed End Equity Income fund (ZTR). Here’s what I found:

ZTR in 2001: +18.74%
ZTR in 2002: -13.92%
Total over 2 years: +4.82%

S&P; 500 in 2001: -11.89%
S&P; 500 in 2002: -22.10%
Total over 2 years: -33.99%

Judge for yourself which one came out ahead.

While I am not a proponent of indexing, because of the severe bear market problems, I am in favor of using inexpensive index funds/ETFs. To me, the better way would be to combine index funds with trend tracking to avoid the above problems.

However, judging by the firmness of the debate in the article, I doubt that either of the gentlemen would be open to any other suggestions.