Index investing was for a long time synonymous with tracking the S&P 500, “America’s index.” But as the golden anniversary of index fund investing approaches, the strategy is widely available across and within asset classes. Its appeal is evident: Indexing is an easy-to-understand, cost-effective strategy that can offer diversification, tax efficiency, and consistent performance relative to the results of the market.
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1. When John C. Bogle launched Vanguard 500 Index Fund on August 31, 1976, as First Index Investment Trust, he gave individual investors access to a strategy previously available only to institutional investors. The first index fund for individual investors embodied the Vanguard founder’s belief that most investors are better served by owning the whole stock market, at low cost, rather than trying to beat it.
2. Mr. Bogle hoped to raise $50–150 million in initial underwriting to launch Vanguard First Index Investment Trust. The offering raised a little more than $11 million—“an abject failure,” he later put it, in his characteristically blunt style. But what began as an experiment—“Bogle’s Folly,” to some—eventually became a default investment approach for millions.1
Share certificate for the first index mutual fund, later renamed Vanguard 500 Index Fund.
3.A few months after the launch of First Index Investment Trust, an article in an investment professionals’ journal opened as follows: “An investor seeking expert opinion on index funds might well be confused by what he hears. One conclusion, usually expressed with considerable feeling, is that index funds are a ‘cop-out’ and a fad that will soon disappear. Apparently only a very small minority hold the opposite point of view. They consider index funds the wave of the future ….”2
4.Jan M. Twardowski first led the portfolio management effort. In 1977, shortly after the First Index Investment Trust launched, a reporter for The New York Times wrote that Mr. Twardowski felt “that the fund’s ‘very low’ total operating costs ... will begin to prove more popular with investors.”3
5.Academic support for the strategy preceded the first index-tracking portfolios for institutional investors and Vanguard’s offering for individual investors. In 1973, one such supporter, Princeton University professor Burton S. Malkiel, suggested a new investment instrument: “a no-load, minimum-management-fee mutual fund that simply buys the hundreds of stocks making up the market averages and does no trading (of securities) …. Fund spokesmen are quick to point out, ‘you can’t buy the averages.’ It’s about time the public could.”4
6.In his 1951 undergraduate thesis for Princeton University, Mr. Bogle highlighted the crucial role of costs in the long-term returns earned by investors. He identified costs as a drag on the performance of the industry, which was then entirely actively managed.
7.In the years following 1976, Mr. Bogle famously—and often—advised investors ....
Vanguard founder John C. Bogle, pictured in 1989.
8. Indexing is integral to U.S. retirement savings. As of year-end 2024, 96% of defined-contribution retirement plans offered target-date funds, which rely on indexing as a core building block.v
9. 529 educational savings plans in the United States also rely to a meaningful degree on index funds, according to data from Morningstar.6
10. Index funds can help to enhance market stability in times of market stress. Investors in index-based strategies tend to stay invested during periods of volatility, providing a reliable source of capital.
11. The diversity of index strategies allows investors to move capital across wide swaths of the market, enabling price discovery beyond a narrow group of stocks. That’s because different index funds hold distinct sets of securities, and reallocating assets among them leads to trades that contribute to price formation—even though the index fund investor isn’t making active stock picks.
12. Market data show that volatility and liquidity patterns have remained stable as index investing has grown, indicating that index funds coexist with—and support—well-functioning, dynamic capital markets.7
Notes:
For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
All investing is subject to risk, including the possible loss of the money you invest.
Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Diversification does not ensure a profit or protect against a loss.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Investments in bonds are subject to interest rate, credit, and inflation risk.