Jack Bogle needed hefty amounts of brainpower and market know-how to put together the first index fund. But for investors wanting to cash in on his idea, it's become pretty easy.
In 1975, the founder of Vanguard Group, who died Wednesday, was able to turn a long-held belief into reality, namely that it was far more profitable to follow the market than fight it. Most mutual fund managers who picked stocks couldn't keep up with basic benchmarks like the S&P 500, much less beat them, he found.
So he turned his thoughts into action, putting together the first fund that simply followed the S&P 500, minus a small management cost that was much cheaper than the active funds of the day.
"When I founded Vanguard, I never sought to leave a legacy as such," Bogle wrote in his final book, published in 2018, titled "Stay the Course: The Story of Vanguard and the Index Revolution." "My goal was to create only an enterprise that was of the shareholder, by the shareholder, and for the shareholder."
That one invention, the First Index Investment Trust, has spawned a massive industry that rules investing today. Bogle's passive fund has only a relative handful of peers in the mutual fund space, but exchange-traded funds, of which he was suspicious, have brought index investing into the mainstream.
The ETF industry now boasts 1,977 funds, with $3.57 trillion in assets. Most are set up to track indexes.
The mechanics of buying classic funds are easy; choosing the right funds to fit your portfolio less so.
The first step is to choose a provider, or one of the growing number of firms that offer index funds. Many of the firms that provide passive mutual funds also provide ETFs.
Some of the mutual fund leaders are Bogle's Vanguard, as well as Fidelity and Charles Schwab.
On the ETF side, BlackRock's iShares lead, with $1.4 trillion in assets, according to ETF.com. Vanguard, State Street, Invesco and Schwab round out the top five of some 137 firms that are now players in the industry.
From there, investors need to figure out which index or indexes they want to follow. All the big ones can be tracked, such as the Dow Jones Industrial Average, S&P 500, Nasdaq and the Russell 2000 small-cap gauge.
However, those offerings have blossomed as well. There are now a staggering 161 index providers listed across four different exchanges, providing investors a dizzying assortment of choices, from basic sectors to strategies like high-dividend and buyback providers and the popular FAANG trade of tech leaders.
Then there are fees.
Index funds have always been cheaper alternatives to stock picking, but they've gotten more so over the past few years. Industry leaders have been involved in an aggressive price war that has taken the costs in some cases close to zero.
Of course, nothing is foolproof, so there are dangers in passive investing.
Because big stocks historically dominate indexes, outsized waves of selling in a few names can drag down returns. Market pros also worry about liquidity issues, or what would happen if an absence of buyers should suddenly hit. And Bogle himself, while a big advocate of passive investing using index-tracking mutual funds, worried that ETFs invited speculation and were being used primarily by big institutional investors for hedging purposes.
But the avenue to index investing is a wide-open one for individual investors who want to emulate Bogle, who will be remembered as one of investing's great pioneers.
The five biggest index mutual funds:
The five biggest index ETFs by market capitalization are: