Index Funds Celebrate Their 50th Birthday  

As it turns out, it pays to be average. 

Fifty years ago today, Vanguard launched the world’s first publicly available S&P 500 index mutual fund, the Vanguard First Index Investment Trust, now the Vanguard 500 Index fund. Half a century later, index funds have gone from what was once referred to as “Bogle’s Folly” (after founder Jack Bogle, when the fund raised only about a tenth of what he had hoped) to holding more than half of US fund assets, and spawning the rise of ETFs. In 1980, shortly after the index fund was launched, only about 5% of American households held mutual funds, according to the ICI. Today, more than half do.

“The index fund is the biggest financial innovation in the last century,” said Carlos Diez, founder and CEO of MarketGrader.  “Today, anyone with any amount of money can partake in the growth of the US economy, as reflected in the stock market, pretty much at zero cost.”

Mind Bogling 

Vanguard was born as a back office company that was mutually owned, which was basically unheard of for asset management. This mutual ownership is the real key to the index fund’s success, because it led to lower fees, said Eric Balchunas, an ETF analyst at Bloomberg Intelligence and the author of The Bogle Effect. Since the fund was owned by investors, when it started getting more money, the board decided to lower the fee (rather than keep the profits, as shareholders would likely have chosen). “A high cost index fund is not that valuable. It’s a low cost index fund that’s the thing,” said Balchunas. “If [Bogle] is the father of anything, he’s the father of low cost … which is his real gift to humanity. Index funds are just a byproduct of being the best format for low costs.” 

This low cost allows large-cap index funds to reliably outperform actively managed funds: Only 10% of actively managed large-cap funds beat the S&P 500 over the last 15 years, according to S&P Global. That’s why they still account for where the majority of assets are held:  

• Index funds hold almost 54% of all fund assets, with $21.9 trillion in index funds compared to $18.8 trillion in actively managed funds, according to the ICI.
• This is despite the number of index funds only being about a quarter of the amount of active funds, with 2,590 index funds and 8,721 active funds, as of the end of June. 

Gaze Into the Crystal Ball: Balchunas sees the next 50 years of indexing as a wave of consolidation. “Right now, there’s 750 ETF and mutual fund companies. I think that number gets cut in half,” he said. “We’re going to see three or four companies control 70% of all the assets, and they’re going to compete on fees. A lot of passive, a little active, but just a very low cost, brutal scale game.”