How Index Funds Stole Trillions from Wall Street

The best tribute to Vanguard founder John C. Bogle near the end of his long life cannot be repeated without heavy censorship. It was a quote in Financial Times journalist Robin Wigglesworth’s book,Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever, attributed to Gawker writer Hamilton Nolan. Nolan wrote, “Che Guevara looks good in a beret, and Eldridge Cleaver had his moments, but today let us all take a moment to honor Real Mother…ing Hero of the People: John mother…ing Bogle, who has kept hundreds of billions of dollars out of the pockets of Wall Street greedheads.”

How true this is can be illustrated by a greedhead niche that Bogle had only barely penetrated. Administrators of large public pension funds in the United States still award the management of their funds to high-fee active investment managers, including heavy allocations to hedge funds, private equity funds and other alternatives to standard stock and bond funds. On average, each public fund hires 182 investment managers. In aggregate, these managers underperformed an equivalent mix of total market stock and bond index funds over the last 12 years by more than one and a half percentage points a year. For this failure, they have charged fees that have cost the average U.S. taxpayer $500 each year – a total of $68 billion annually.

Had they invested in index funds instead, the fees would have been less than a hundredth as much.

Greedheads indeed.

A long history

It is a long and winding path Wigglesworth covers that led to index funds. They have only picked up speed in the current century.

I was present during some of the earlier part of that history. I have strong memories of the events and personalities and how I felt about it all. I even had some real involvement, in a way. With the reader’s forbearance, I will indulge myself and give a few anecdotes from that time.

Wigglesworth covers the development of the index fund at Wells Fargo Investment Advisors (WFIA) in the late 1960s. That was a little before my time. I came in shortly afterwards.