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Stephen Mihm

How Index Funds Prevailed

The notion of eliminating the role of the middleman was not popular with money managers.
Vanguard's John Bogle once dismissed the idea.

Vanguard's John Bogle once dismissed the idea.

Photographer: Scott Eells/Bloomberg

Forty years ago last week, Vanguard’s John Bogle created the first index mutual fund, offering investors a guarantee: They would never outperform the market, but nor would they underperform it. The Index Investment Trust (now the Vanguard 500 Index Fund) simply tracked the performance of the S&P 500.

Index funds are now a huge business, accounting for trillions of dollars of mutual fund money. And with good reason: Even though their returns are utterly average, their minimal fees bring big savings for investors, allowing them to outperform actively managed funds over the long term.