On this day in economic and business history …
The first index fund was created on Aug. 31, 1976. The First Index Investment Trust, as it was called, had been created and sponsored by Vanguard, and it’s now known as the Vanguard 500 Index Fund Investor Class (MUTF:VFINX). It was a “seminal event in investing … a steady revolution that continues today,” according to analysts at Morningstar. Here is its story, straight from index fund pioneer and Vanguard founder John C. (Jack) Bogle:
The idea that passive equity management could outpace the active management that was until then the mutual fund industry’s universal strategy was derogated and ridiculed. (The fund, now Vanguard 500 Index Fund Investor Class (MUTF:VFINX), was referred to as “Bogle’s Folly.”) Yet today indexing has earned broad, if begrudging acceptance. Assets of index mutual funds now total about $2 trillion, one-fourth of all equity fund assets. Indeed, over the past five years, index funds have accounted for more than 100% of all equity fund cash flows. Indexing is clearly an idea whose time has come.
Back in 1976, my associates at Vanguard shared my confidence that indexing would ultimately come to reshape the mutual fund industry. After all, equity mutual funds as a group were destined to roughly track the returns of the entire stock market — but only after the high costs of mutual fund investing. Not only management fees and operating expenses averaging about 1.5% of assets per year; not only the hefty sales loads paid to brokers on the sale of fund shares of most funds; but also the embedded (and undisclosed) costs and tax impact of portfolio turnover. All-in, fund investment costs could easily reach 3% per year, virtually guaranteeing that fund investors as a group would experience a substantial shortfall to the market.
By contrast, that first index fund, based on the Standard & Poor’s 500 Index, paid no management fees (after all, it required no active management); was expected to maintain an expense ratio of 0.3% per year; would, following the IPO, eliminate all sales loads; and would have minimal portfolio turnover and provide high tax efficiency. By holding investment costs to the bare minimum, the index fund would virtually guarantee that its investors would earn their fair share of stock market returns.
As Bogle says, indexing is indeed an idea whose time has come. Roughly four out of five active large-cap mutual fund managers trailed the S&P 500 in 2011, and more than half the funds in all mutual fund categories trailed that index in the three years ending in 2011. There are over 350 different index funds to choose from today, and that number has remained relatively stable for nearly a decade.
General Motors Company (NYSE:GM) began an 84-year streak on the Dow Jones Industrial Average 2 Minute (INDEXDJX:^DJI) on Aug. 31, 1925. This is — as of 2013 — the fourth-longest stretch of index membership since the Dow Jones Industrial Average 2 Minute (INDEXDJX:^DJI) was created in 1896. It wasn’t even General Motors Company (NYSE:GM)’s first time on the Dow Jones Industrial Average 2 Minute (INDEXDJX:^DJI), as the diversified automaker had been a member for a year and a half beginning in 1915. However, the auto industry had been progressing at a breakneck pace since 1916, and General Motors Company (NYSE:GM), as the largest publicly traded automaker, was an ideal representative (although not the only one, as Mack Trucks was also a component at the time)
In 1915, gasoline cost $0.08 per gallon (equal to $1.85 today) and a new car cost $500 (equal to $11,600 today). Chevrolet had not yet joined General Motors Company (NYSE:GM)’s stable and had not yet cranked up production as an independent automaker, so General Motors Company (NYSE:GM)’s auto production that year was roughly 65,000 vehicles between Buick and Cadillac.