Bogle Says If Everybody Indexed, Markets Would Fail Under Chaos

(Bloomberg) -- Investors wouldn't have a way to capture value in the stock market if it were entirely held by passively managed funds, according to Jack Bogle, the founder of Vanguard Group.

“If everybody indexed, the only word you could use is chaos, catastrophe,” he said in an interview with Yahoo! Finance Saturday. “There would be no trading, there would be no way to convert a stream of income into a pile of capital or a pile of capital into a stream of income. The markets would fail.”

But Bogle, who spoke on the sidelines of the annual shareholders meeting of Berkshire Hathaway Inc. in Omaha, Nebraska, also said the chances of everybody indexing is "zero."

Warren Buffett, Berkshire's chief executive officer, called out Bogle's presence in the audience at the start of the meeting, and praised him for helping millions of American investors save on fees and realize better returns. Bogle created the first index fund for retail investors and has championed the view that most active managers could do no better than the index over time.

More on Buffett's views at meeting of active managers, hedge funds

A flood of investors have followed his advice in recent years. In 2016 they poured $480 billion into passive funds, a mix of mutual funds and exchange-traded funds, while pulling more than $380 billion from active mutual funds, according to data compiled by Bloomberg.

Passive equity investments may become as much as 45 percent of the mutual fund industry within five years as investors move to low-cost funds, Bogle said in an interview on Bloomberg Radio in March. It's now between 20 percent and 40 percent, Bogle said on Saturday, and could reach 75 percent without posing a significant market risk.

He distinguished ETFs from other funds that track the indexes, saying that investors in those products don't maintain the same "buy and hold" mentality.

See our QuickTake on Active vs. Passive Investing here

To contact the reporter on this story: Sonali Basak in New York at sbasak7@bloomberg.net.

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net, Margaret Collins, Kenneth Pringle