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.”

There hasn’t been this much buzz about ticket charges since the Department of Justice settled its long-running antitrust case against Live Nation, the owner of Ticketmaster.

But this isn’t about concerts and the gargantuan markups on the resale marketplace. And the story is much bigger than almost anything else in asset management and financial advice this year: Vanguard is buying the fintech-powered RIA custodian Altruist. From an ETF angle, the deal could affect the platform fees that issuers pay other custodians — or decline to, which can limit their distribution.

“The RIA platforms / custodians could not have been happy to hear of the Vanguard / Altruist arrangement,” said Neil Bathon, managing partner of Fuse Research Network, noting that the deal stands to boost distribution of Vanguard ETFs via its model portfolios. “It is only natural to assume that Vanguard’s core positioning as the industry’s most efficient operator will reflect itself in downward pressure on platform fees.”

Platform Diving?

The shift in popularity of mutual funds to ETFs, along with the advent of dual share classes, has led custodians (and broker-dealers) to reconsider how they are compensated for making products available. Fidelity, for example, charges issuers a 15%-of-revenue fee for shelf space, and those that don’t pay might have their products end up on a list that is subject to a $100-per-purchase charge for investors. Similarly, Charles Schwab is set to reinstitute platform fees on ETFs, the latest indication that free trading is becoming less common. The decisions that Vanguard makes about Altruist, after the acquisition closes later this year, will either reinforce that or pressure other custodians to roll back platform fees.

“We don’t charge any asset/fund manager platform fees or require any form of revenue share from their fees. Remaining open architecture so that advisors can choose the investment products and strategies best for their clients is important to us,” Altruist founder and CEO Jason Wenk told ETF Upside. “I expect Altruist to be the preferred custodian for many asset managers, as they will not be gated with unnecessary platform fees.”

There’s another good reason why Vanguard would avoid charging competitors for shelf space. “Vanguard certainly wouldn’t want to have ETF rev-shares or ticket charges on their own ETFs, and at that point it doesn’t look good (and probably risks outright anti-trust/competitiveness rules) if they tagged all their competitors with costs but exempted themselves,” XY Planning Network cofounder Michael Kitces said to ETF Upside. “They’re already the lowest cost competitor, so if they simply squeeze our custodial rev-shares, everyone’s costs come down, but Vanguard’s are still cheapest, which wins for the marketplace and wins for Vanguard. And they gain the potential for more growth of their Altruist platform, because now all other asset managers might start nudging advisors to check out Altruist so the asset managers can avoid Schwab/Fidelity rev-shares.”

Low, Low Prices: Assuming Altruist continues to operate without platform fees, more RIAs could be lured to Vanguard, but that would happen gradually, said Jeff DeMaso, editor of the Independent Vanguard Adviser. “Switching custodians is a big ask for advisors. In other words, it’ll take time for Vanguard/Altruist to take [market] share from Fidelity/Schwab … and they won’t go ‘down’ without a fight,” he said. “That’s probably a good thing for fund companies and advisors.”

Giving everyone their fair share just got more popular.

Fears of an AI bubble and high levels of market concentration may be sending investors to more diversified options. Earlier this month, Invesco’s S&P 500 Equal Weight ETF (RSP) surpassed $100 billion in assets under management and has brought in more than $12 billion this year alone, per a CNBC report. RSP and other equal-weight funds give the same value to each of their underlying stocks rather than mirroring an index. To investors, they can represent a welcome reprieve from the S&P 500, which derives around a third of its value from the tech sector alone. The trend could signal a change in how investors think about the role that S&P 500 funds play in a portfolio.

“Right now, we’ve got the Mag Seven about 34% of the total S&P 500 index, which is at historic levels,” said Don Cody, CEO at Global Macro Asset Management. “I think [equal-weight fund popularity is] largely fear and concern that we’re overweighted in areas that are obviously the drivers of the market.”

Weighing the (Equal) Options

There are a few dozen equal-weight ETFs that invest across broad market indexes and more narrowly defined sectors, although RSP is the biggest and most popular. That fund has also outperformed the S&P 500 year to date, causing investors to take note — especially those who remember the Great Recession, Cody said. “We’ve been here before with the tech boom, the housing boom,” he said. “This is oftentimes symptomatic of a topping market. That’s not to say it can’t go higher, it certainly could … But is there room for concern? Absolutely.”

The next three largest equal-weighted index ETFs after RSP, according to ETF.com, are:

• The Invesco S&P 500 Equal Weight Technology ETF (RSPT), which has about $5.8 billion in assets and is up 42% year to date.
• The Invesco S&P 100 Equal Weight ETF (EQWL), which has about $2.8 billion in assets and is up 14% year to date.
• The Goldman Sachs Equal Weight US Large Cap Equity ETF (GSEW), which has roughly $2 billion in assets and is up 13.7% year to date.

All My Eggs In Many Baskets: Equal-weight funds aren’t the only option for the concentration-wary investor, however. Some thematics, like defense tech, have relatively low overlap with the index and can allow investors to remain in high-performing sectors without betting everything on one strategy, said Pedro Palandrani, head of product research and development at Global X ETFs.

“For investors concerned about concentration, [thematics are] an opportunity to maintain a core allocation while adding exposure driven by different long-term trends rather than simply re-weighting the same crowded names,” he said. “The key is to look through the label and understand the actual overlap.”