Passive investing with a large dash of active hypocrisy

Jack Bogle had a simple idea. Don't try to pick the needle. Buy the haystack.

His logic was pure arithmetic. All investors collectively own the market. Their collective return, before costs, equals the market return. After costs, the average investor must underperform the market by exactly the fees they pay. Therefore, a reliable way to beat the average investor is to pay less.

In 1976, Bogle launched the first index fund for ordinary investors, being what is now the Vanguard 500 Index Fund. The financial industry called it “Bogle’s Folly”. He didn’t mind. In 2026 Vanguard is managing over $12 trillion, and index investing has become the dominant investment approach globally.

The industry’s verdict on Bogle’s Folly has been comprehensively reversed. But somewhere between Bogle’s original idea and today, something else happened. Something worth paying attention to.

The investment management industry is super smart, as it takes ideas and twists them into new ways to make money.  Fund managers and advisers have latched on to promoting Bogle’s thesis with a twist.  Creating, promoting, and advising clients to invest in thematic index funds, smart beta, rules based or scientific ETFs has been an incredibly profitable way for the industry to evolve.

While believing in active management, we also are pragmatic and offer our client’s access to broad market index funds

While recent history has played against active management in some asset classes, particularly equities. At Aurellan, we believe that through a strong manager research process we undertake with our global partner, Wilshire, outperforming active managers can be identified.

It is worth noting where we manage diversified portfolios, like we do for our founders’ families’ portfolios, as well as external clients such as foundations, charities and other family offices and trusts, if a client has a strong preference for low-cost tax-efficient broad-based index funds, or the client’s fee budget is best spent elsewhere, then we also have these funds available.

“Broad-based index funds” is the key alignment with Bogle’s thesis, as the data shows us that adding value by actively selecting thematic “index” funds, using a modified index is a fool’s errand, so let’s dig more into what we mean.   

Not all indices are created equal

The ETF and index fund wrappers that Bogle helped create turned out to be remarkably versatile. While the passive global share funds we use track broad-based indices like the MSCI All Countries World Index, the same indexing approach and methods can be used to create ETFs focused on a plethora of thematic sectors including healthcare, automation, and robotics to name but a few.

The result is a proliferation of over 5,000 ETFs in the US alone. Each one technically tracks an index but many come with a twist such as being thematic index funds, smart beta, rules based or scientific Usually, these twists are just a twist away from passive, towards an index which is very active relative to a broad market index.The possibility of what an index can be are endless, almost literally, according to the Index Industry Association, there are about 3 million indices globally. And yes, you read that right, in other words there’s about 50 times more indices than actual individual listed company stocks globally.

Herein lies the problem. A robotics ETF could well be technically considered passive because it tracks an index and does not try to pick which robotics company will outperform. But the decision to buy a robotics ETF instead of following Bogle’s advice of focusing on the total overall market fund is an active decision, is an active bet that robotics companies will outperform the broader market. The fund in some sense is passive. The investor’s decision to pick the fund is not.

Bogle himself was clear on this. He warned specifically that ETFs would encourage speculation and that thematic products were not what he had in mind. His instruction was unambiguous: own the entire market, at the lowest possible cost. Not “the automation part of the market.” Not “the clean energy part of the market at a higher fee.” The whole market at the lowest possible fee.

The New Zealand version of the problem

New Zealand investors are well served by two platforms that have done more than anyone to bring genuine index investing to ordinary Kiwis: Kernel and Smart.

Many of their core products are exactly what Bogle was talking about. Smart’s NZX 50, US 500, and international equity products. Kernel’s S&P 500 is another example of this. Broad. Low cost. Genuine passive index funds.

Both platforms then offer something else. Smart has its Automation and Robotics ETF (BOT), Healthcare Innovation ETF (LIV), Bitcoin ETF (BTC), and Gold ETF. Kernel has its S&P Global Clean Energy Fund, Global Dividend Aristocrats and Global 100 (focused on the largest global companies).

Neither platform is doing anything wrong by offering these products. They exist because investors want them. But here’s the thing.  An investor holding NZ 20, Global 100, Clean Energy, Automation and Robotics, and Healthcare Innovation has made five distinct active allocation decisions and is making investments in funds not tracking broad market indices. Their returns will differ considerably to a portfolio comprised of more recognised benchmarks like the S&P/NZX 50 and MSCI All Country World Index. In other words, the result an investor can get, despite investing in “index” funds, can be more active than funds managed by active managers. We don’t think these products are what Bogle originally envisaged when he said to “buy the haystack”.

The performance record nobody is talking about

Kernel's S&P Global Clean Energy Fund is instructive. While for the one year ending 31 July 2026 its return might be over 50%, importantly its five-year return is only roughly 4% per annum. Over the same period, an unhedged S&P 500 index fund returned roughly 16% per annum. The investor who bought the clean energy "theme" underperformed by almost 12% per annum and took considerably more volatility to do it. In cumulative terms a difference of nearly 90 percentage points. Hardly a passive outcome.

This is not unusual. Morningstar's work on thematic funds found that over five years the funds themselves returned 7.3% per annum, while the investors in them earned just 2.4%, a gap of nearly five percentage points a year, driven almost entirely by timing. Investors bought when the story was exciting, which is to say when the holdings were expensive, and sold when the story faded, which is to say after the holdings had fallen.

What would Bogle say?

We think Bogle would look at New Zealand’s core ETF offerings and see products he spent his life arguing for. Kernel’s S&P 500 fund. Smart’s NZX 50 product. Vanguard’s Total World Fund at 0.06% per year, giving a Kiwi investor ownership of virtually every listed company on earth for almost nothing.

He would look at the thematic range of “index funds” that have been created and note with characteristic restraint, that the financial industry had found yet again a way to dress up a very old product in very new clothes. He would observe that passive investing in an active theme is an oxymoron. He would point out that the fees are higher, the evidence for outperformance is absent, and the behavioural pattern has not changed in fifty years.

Bogle’s original instruction was not complicated. Don’t look for the needle in the haystack. Buy the haystack. The whole haystack, and at the lowest possible cost.

The passive revolution succeeded. However, the industry’s response was to quietly build a new form of active management through the creation of active index funds, while charging investors a premium fee for these. The emperor’s new portfolio is impeccably constructed. It is also, on close inspection, doing exactly what the emperor claimed he had given up.