Index-based exchange-traded funds (ETFs) have changed the world of investing, but while result has been broader market exposure at lower costs, the news has not all been good for investors, John Bogle, Vanguard’s founder and pioneer in low-cost investment options, told journalists and board members at the Journal of Indexes board meeting at the Nasdaq building in New York City yesterday.

While the indexes were down 37% last year, indexed-based funds still outperformed two-thirds of active managers. And the bond market index fund is up 5%, so while most people have lost money, investors in index vehicles could have done a lot worse, he says.

Index funds in general now account for $914 billion in equities and $150 billion on the bond side. ETFs, now ubiquitous, now account for $457 billion in equity assets up from virtually nothing just a few years ago and are now just as big as their classic index fund counterparts.

But ETFs’ success has come at a price for investors. Bogle says that of 77 ETFs Vanguard looked at recently, 68 dramatically lagged behind gross market returns over a five-year period, particularly those covering emerging markets.

Advisors should make sure they know what returns investors are really getting, he says. “I think investor returns should be shown in prospectuses and they should be a central thing [advisors] look up every day.”

Expense ratios mean that broad-market funds “are the only way to go,” Bogle says. However, these funds number just 21 out of 689. The remaining 97% are what Bogle calls “specialty ETFs,” which account for $528 billion, or 78% of all ETF assets.

This product diversity is putting investors at risk. “It’s looking an awful lot like a marketing business, which is about finding out what the market wants and giving it to them,” Bogle says. While this seems like free-market capitalism, Bogle says it flies contrary to fund companies’ fiduciary duty, which is ultimately to help people to retire, to buy a new home or to send their children to college. By creating an endless stream of increasingly obscure ETFs, the industry has merely created a dangerous culture of speculation, and the cracks are starting to show. While a feverish 220 ETFs were launched in 2008, 58 shut down. Only 40 have launched so far this year; 45 are closed for business. But looking at what those shuttered ETFs covered tells the real story of how skewed the ETF business has become, Bogle says. “Global vaccine, homeland securities, Wal-Mart suppliers?” he asked rhetorically. “Gee, do you think we’ve gone too far?”

Worse, the more obscure an ETF’s index, the more it costs to run it, expenses that Bogle says take an unconscionable bite out of investors’ ability to capture long-term market returns. The ETF market’s current focus on speculation through narrowly segmented product offerings “can’t possibly keep up with broad-market exposure in the long run simply because of the sheer cost of speculation, and investors are at the bottom of the food chain” after management fees, marketing and brokerage commissions when it comes to getting paid, Bogle says. “We all share market returns before costs, so whoever pays the lowest cost wins.” Paying the smallest possible price is the only way to guarantee a fair share of market returns, he says.

What the ETF world really needs is a step backward, he says. “I’d like to bring the ‘no’ back into mutual-fund innovation,” says Bogle, paraphrasing an old commercial for Shredded Wheat cereal. “It’s been an expensive drag on society and all it has resulted in is a smaller return for investors. Mark me down as an ancient Luddite, but speculation is a loser’s game.”