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Bogle: ETF Flows Muddle Valuation, Risk Picture

Large swings in ETF flows make it hard to forecast valuations and are likely introducing new risks into the market, says Vanguard founder Jack Bogle.

Christine Benz: Do you think there's a risk that investors today, given the length of this current bull run for stocks, are a little bit complacent about equity market risk? Do you think they've kind of forgotten how terrible the losses were during the financial crisis and it's kind of off to the races with heavy equity allocations?

Jack Bogle: Well, that's a really hard question to answer. We know what mutual fund flows are, and they're very, very heavily oriented toward index funds, which is a vote of confidence basically in American business, and we know they're very negative on managed funds, but it balances out to cash flowing in regularly. The fly in the ointment in all these monthly data we see--which I think can now be safely disregarded--is we have exchange-traded funds and the swings in exchange-traded funds from one month to another in their cash flows are extraordinary. I don't know the exact numbers, but at the market high back in 2007 in the month that it hit its high, maybe, I guess it was April or May maybe, investors in ETFs bought I think around $30 billion in a given month. When the market hit its low or shortly thereafter, February or March of 2009, they withdrew at the bottom about $30 billion. I think maybe closer to $20 billion.