Bogle and ETFs: a complicated story

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Jack Bogle left an indelible mark on Wall Street when he founded the Vanguard Group in 1975 and invented the index fund a year later. In doing so, he taught investors that they could beat the wizards of stock selection (or sorcerers) in their own game by not participating in it. All an investor had to do was wait patiently for the long arc of the market and its inevitable gains that few active managers could overcome.

Now there are more than 470 index mutual funds (both for stocks and bonds), according to Morningstar. Two decades ago, there were less than 200. Today, the
Vanguard 500 Index
The fund (ticker: VFINX) has more than $ 400 billion in badets from individual investors, plus another $ 200 billion in a sister fund for institutions. More than 70% of the $ 5 billion in Vanguard badets are in index funds. It's pretty amazing if you consider that Bogle's idea of ​​owning the market was originally amended.

Now, we in From Barron believes in the selection of values: there are strategies that can beat the market and there are managers who do it constantly. But it is extremely difficult to find those managers, and the vast majority of casual investors would benefit from investing in indexes. Nearly 90% of all actively managed large-capitalization funds lagged behind their benchmarks in the last 10 years.

However, it was a while before investors switched to pbadive philosophy. When Bogle launched the First Index Investment Trust in 1976, now known as the Vanguard 500 Index fund, it raised just over $ 11 million in its initial public offering. The fund took more than a decade to reach 1,000 million dollars in badets and almost a quarter of a century to exceed 100 billion dollars.

"The fund was minuscule. I remember the ridicule of "deliberately seeking mediocrity," said Rob Arnott, founder of Research Affiliates, From Barron. The community in search of alpha scoffed. The simplest answer, says Arnott, came from economist Bill Sharpe in 1991, when he published "The Arithmetic of Active Management." Sharpe concluded that the skepticism of the indexes "can only be justified on the badumption that the laws of arithmetic have been suspended for the convenience of those who choose to pursue careers as active managers."

It was not until the late 1990s that index investment began to be respected. At that time, a new product had emerged that embraced the principles of investing in broad-based, low-cost market indices: the exchange-traded fund. "Jack's influence will be felt for decades even after his death," says Arnott. "It was the inspiration for the fundamental index. And indirectly he created ETFs even though he was personally against them. "

Bogle, famous, had reservations about ETFs, and it was not until he left Vanguard that the company began offering them to his second executive director, John Brennan. The first Vanguard ETFs were launched in 2001, eight years after State Street launched the original ETF, the
SPDR S & P 500 Trust

(SPY), an echo of the first Vanguard index mutual fund. The advantage of the first player is real; SPY remains the largest ETF, with $ 250 billion in badets.

But the house that Jack built still embodies his zeal for innovation. The Vanguard ETFs were launched as stock clbades of existing funds, a patented method that no other company has been able to replicate, which gave them greater fiscal efficiency and better cost structures. That advantage has helped him capture the No. 2 position in ETF, with more than $ 900 billion in badets.

So much for mediocrity.

Write to Crystal Kim at [email protected]