Hiltzik: Vanguard stands firm against cryptocurrencies

After January 10, when the Securities and Exchange Commission approved the first bitcoin exchange-traded investment products, the largest investment firms jumped into the pool with both feet, scrambling among themselves to offer their clients, both big and small, access to funds Bitcoin.

All of that, except for the second-largest private investment management fund on the planet, Vanguard Group.

The company recently clarified in a January 24 letter to its customers that it has no plans to offer a bitcoin exchange-traded fund (ETF) or any other cryptocurrency-related products. It will also not allow any of these products from other companies to be offered through its brokerage arm.

Vanguard specifically explained why it avoids cryptocurrencies despite the “headlines and hype” the asset class generates. Simply put, don't think that cryptocurrencies belong in individual investors' wallets.

This is a smart and responsible policy that puts the interests of Vanguard clients ahead of those of the greedy promoters and scammers that plague the entire cryptocurrency space.

Bitcoin and other cryptocurrency investments usually lead to financial disaster for ordinary investors. Stories of losing life savings in supposedly safe cryptocurrency investments are alarmingly common.

Vanguard executives know they are swimming against a wave of pro-crypto propaganda from entertainment and sports stars as well as prominent authors. This doesn't bother them.

“From Vanguard’s perspective, cryptocurrencies are more speculation than investment,” Janelle Jackson, the firm’s global head of ETFs, said in the recent letter, which was titled “No Bitcoin ETFs at Vanguard? Here’s Why “

“With stocks, you own a stake in a company that produces goods or services, many of which also pay dividends,” she wrote, contrasting cryptocurrencies with traditional asset classes. “With bonds, you get a stream of interest payments. Commodities are real assets that satisfy consumption needs,” she wrote. [and] It has inflation hedging properties…. Although cryptocurrencies are classified as a commodity, they are an immature asset class with little history, no inherent economic value, no cash flow, and can create clutter within a portfolio.

These words are important for several reasons. The first is Vanguard's size: With more than $7 trillion in assets under management as of 2023, the company ranks as the second-largest U.S. investment manager, after BlackRock ($9 trillion). Also, more than many other companies, Vanguard's target market is retail investors who follow a long-term buy-and-hold strategy.

Then there's Vanguard's history of viewing the trendy investing crazes of the month skeptically and keeping them off its platform.

Before we delve deeper into the Vanguard decision and its history, a few words about the SEC's decision to greenlight Bitcoin ETFs.

Under the leadership of its head, Gary Gensler, the agency has consistently resisted granting approval to cryptocurrency-based investment plans. in Tweet most recently on January 9Gensler advised investors to “be careful” about anything related to crypto assets. “There are serious risks involved,” he wrote.

However, the next day, the SEC approved proposals from several investment firms for Bitcoin ETFs after rejecting 20 applications dating back to 2018. Gensler noted after the vote that what had changed was that the SEC's hands were tied by a ruling from The federal appeals court in Washington, D.C., found that the commission had not brought legal action to deny the latest request.

Gensler stressed that the SEC's vote does not mean that its general aversion to cryptocurrency investments has changed. He cautioned that the ETF it approved is limited to holding one cryptocurrency, Bitcoin, and should not be taken as an indication that the commission will look kindly on other cryptocurrency-based investment products.

The commissioner was Carolyn A. Crenshaw, like Gensler a member of the SEC's Democratic majority, is more vocal in opposing approval. Are cryptocurrency markets safe? I asked rhetorically. “Substantial evidence suggests the answer is no.”

She added that spot bitcoin trading underpinning the new ETFs is “so susceptible to manipulation, so rife with fraud, so vulnerable to volatility, and so limited in oversight that we cannot credibly say…that there is adequate investor protection.”

The SEC approval, which covered applications for 11 bitcoin exchange-traded funds developed by firms such as BlackRock, Fidelity and Invesco, inspired a passionate rush from cryptocurrency enthusiasts, who described it as a “game changer” for the asset class. But it did not allay the concerns of other investment watchdogs such as Dennis Kelleher, co-founder and CEO of Better Markets, who called it a “historic blunder” that would lure unwary investors into a “worthless product.”

Among the country's largest investment management firms, almost all of them offer clients opportunities to invest in Bitcoin and other cryptocurrencies. Some market these assets more aggressively than others.

Fidelity, which ranks third in assets under management, behind BlackRock and Vanguard, began offering a bitcoin investment option to employers who sponsor their workers' 401(k) plans in 2022, just a few months before the cryptocurrency scam. Sam Bankman-Fried, FTX, for fraud. (Remember, a federal jury found Bankman-Fried guilty on seven counts of fraud in November.)

Fidelity drew the ire of Democratic Senators Richard Durbin of Illinois and Elizabeth Warren of Massachusetts, who urged the company to back away from the 401(k) option. Fidelity clearly hasn't done that, because it's still promoting bitcoin for 401(k) plans on its website.

This brings us back to the forefront. (I'm an investor in some of its funds; since it's a mutual—owned by the fund's shareholders—I'm technically the owner of the company, albeit a small one.)

To be fair, Vanguard does not promise that it will never offer investments in bitcoin: “We are constantly evaluating our brokerage offering and evaluating new product entries into the market,” Karen Baldwin, a Vanguard spokeswoman, told me via email.

But she explained that bitcoin ETFs would have a mountain to climb to show that they belong to “asset classes such as stocks, bonds and cash, which Vanguard views as the building blocks of a balanced, long-term investment portfolio.” “

All investment firms strive to put their clients' interests front and center, but few have embraced this principle to the extent of Vanguard.

The company was founded in 1975 by John C. “Jack” Bogle. He built the company around the concept of passive investing through index funds. By replicating holdings of major stock indexes, these funds trade relatively rarely because the components of the indexes rarely change.

This reduces commissions and other transaction costs such as taxes, which reduces customer returns. More importantly, such passive investments consistently perform better than “active” fund managers, who trade frequently and choose their investment targets, hoping for a rally in certain stocks or categories of the market.

Bogle was hostile to speculation, rather than investing, until the end of his life in 2019. In a 2012 book called “A Clash of Cultures,” he compared “the culture of long-term investing—the intellectual rock—and the culture of long-term investing.” Philosopher, historian – with a culture of short-term investment – the tool of the mathematician, technician and chemist.

He lamented the latter's “gradual but relentless rise”, “characterised by frenetic activity in our financial markets, and complex and exotic financial instruments”, which have come to dominate a financial system “permeated with self-interest and greed”.

If you think this would make him overly cautious about Bitcoin, don't kid yourself. At an investment conference in 2017, in response to a question about Bitcoin, he replied: “Avoid it like the plague. Have I made my point?”

He explained that “Bitcoin has no fundamental rate of return…. There is nothing backing Bitcoin except the hope that you will sell it to someone for more than you paid for it” — in other words, the “bigger fool” theory.

It is worth noting that such doubts do not always translate into a business decision to avoid the dreaded investment. After all, Jamie Dimon, chairman and CEO of JPMorgan Chase & Co., expressed similar doubts about Bitcoin around the same time, calling it “a scam…worse than tulip bulbs.”

However, unlike Vanguard, JPMorgan has not followed its leader's instincts: the company has been giving clients access to cryptocurrency funds at least since 2021.

The list of trendy investments that Vanguard has denied its clients, which were almost always to their advantage, is a long one. A list recently compiled by Morningstar's John Rekenthaler includes government-added funds of the 1980s, Internet funds of the late 1990s (“What is investing in AI today Internet funds were 25 years ago,” Rekenthaler wrote — fair warning) and “130/”30 fund” from 2009, which held hedge-fund-like portfolios that mixed long and short positions, supposedly delivering returns without adding risk.

As Rickenthaler noted, all of these ideas eventually “crashed and burned.” Vanguard has not adopted any of them, largely because each is contrary to the interests of long-term investors.

Vanguard's policy is clearly stuck in the creep of crypto believers. One he claimed in a tweet The Vanguard representative who contacted him “apologized profusely for management's lack of vision, admitted that they personally owned Bitcoin, and said they had received thousands of calls from customers looking to transfer accounts.”

All we can say to that is: “Oh, sure.” However, here's a prediction: Vanguard, which has been around for nearly half a century, will still be around long after cryptocurrencies have been consigned to the graveyard of investing madness, where they belong.