This arti­cle is a guest con­tri­bu­tion by Matt Hougan, IndexUniverse.com.

John Bogle is wrong: Exchange-traded funds are actu­ally the best avail­able tool for long-term investors. Bet­ter, by far, than mutual funds.

I had this real­iza­tion the other day when I was speak­ing about ETFs at a sym­po­sium orga­nized by Van­guard. Any­time I put Van­guard and ETFs together, I’m reminded of the fact that Bogle, Vanguard’s founder, dis­likes ETFs with a pas­sion rarely seen in the index­ing community.

A year ago, Bogle pre­sented data at our annual Jour­nal of Indexes board meet­ing show­ing that the aver­age dol­lar invested in ETFs dra­mat­i­cally under­per­formed the ETF itself. In other words, investors had a ten­dency to buy high and sell low.

Bogle’s argu­ment was built on impre­cise data, but I’m not going to reopen that. For pur­poses of this blog, I’m less con­cerned with the expe­ri­ence of the aver­age investor than the expe­ri­ence of investors who use ETFs cor­rectly. And for those investors, there’s no ques­tion: ETFs aren’t just equiv­a­lent to mutual funds, they’re qual­i­ta­tively better.

Usu­ally, when peo­ple make this argu­ment, they focus on the fact that ETFs are, by and large, cheaper than mutual funds. While true in gen­eral, it’s almost irrel­e­vant. Some insti­tu­tional mutual funds have lower expense ratios than any ETF. Also, ETF investors bear addi­tional costs in terms of com­mis­sions and bid/ask spreads, which mutual fund investors don’t pay.

On costs alone, it’s a tossup.

Where ETFs truly excel—where they are defin­i­tively supe­rior to mutual funds—is on fairness.

When you buy a mutual fund, you’re exposed to the actions of oth­ers. For instance, if you buy shares in the Growth Fund of Amer­ica, and then half of the investors in the fund decide to redeem out of their posi­tions, you will bear the brunt of the trad­ing costs as the fund sells stocks to meet those redemp­tions. If any cap­i­tal gains are incurred, you will pay those gains, even though you didn’t sell a share and had no inten­tion of exit­ing your position.

If, on the other hand, no one sells, but another $10 bil­lion in investor cash comes into the fund, you have to pay your share of the costs of putting that money to work: the com­mis­sions, the trad­ing spreads, the mar­ket impact, etc.

With ETFs, the only thing that mat­ters is you. Out­side of a small num­ber of bond funds and a few alter­na­tive asset products—such as Vanguard’s ETFs, which share classes of broader mutual funds— exist­ing investors are com­pletely shielded from the actions of oth­ers either enter­ing or exit­ing the ETF. No pay­ing for other people’s com­mis­sions, no pay­ing for other people’s mar­ket impact and, by and large, no capital-gains dis­tri­b­u­tions dri­ven by the actions of others.

Your invest­ment return and tax pro­file are dri­ven by your actions, and that’s it.

This may seem like a minor detail, but if you’re invest­ing for 10 or 20 years, those details add up.

I under­stand Bogle’s con­cerns about ETFs. Too many peo­ple trade them way too often, rack­ing up big costs and they often shoot them­selves in the foot try­ing to time the market.

But the beauty of the ETF struc­ture is that if you’re a long-term investor, none of that mat­ters. It’s just noise.

For the long-term investor, ETFs are the fairer invest­ment, and they should gen­er­ally deliver stronger after-tax returns.

The low, low costs don’t hurt either.

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