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The Inventor of Index Funds.

Byline: John Manganaro

While there are many big names in the financial services industry, few individuals command the widespread admiration enjoyed by John Clifton Bogle, known as "Jack," who founded the Vanguard Group. Bogle died in January at age 89.

Vanguard's statement paints a compelling portrait of the "inventor of the index mutual fund." "Mr. Bogle had legendary status in the investment community, largely because of two towering achievements:

He introduced the first index mutual fund for investors and, in the face of skeptics, stood behind the concept until it gained widespread acceptance. And he drove down costs across the mutual fund industry by ceaselessly campaigning in the interests of investors," Vanguard wrote.

"The company he founded to embody his philosophy is now one of the largest investment management firms in the world."

Bogle coined the term "The Vanguard Experiment" to describe his first attempt to create mutual funds that would operate "at cost and independently," with their own directors, officers and staff. He talked about this as being a radical change from the traditional mutual fund structure, where an external management company ran a fund's affairs on a for-profit basis.

"Our challenge at the time [the mid-1970s] was to build, out of the ashes of major corporate conf lict, a new and better way of running a mutual fund complex," Bogle once said. "The Vanguard Experiment was designed to prove that mutual funds could operate independently and do so in a manner that would directly benefit their shareholders."

Vanguard's statement on Bogle's death says his approach was "ridiculed by others in the industry as unAmerican and a sure path to mediocrity." That first fund collected only $11 million during its initial underwriting. Now known as the Vanguard 500 Index Fund, this product has grown to hold more than $441 billion in assets, while its sister Vanguard Institutional Index Fund has $221.5 billion in assets.

Today, index funds account for more than 70% of Vanguard's $4.9 trillion in assets under management (AUM). Bogle and Vanguard again broke from tradition in 1977, when the firm ceased to market its funds through brokers and instead offered them directly to investors. The company eliminated sales charges and became a pure no-load mutual fund complex. Bogle at the time said this move would save shareholders hundreds of millions of dollars in sales commissions.

Since then, passive mutual funds and exchange-traded funds (ETFs) have exploded in popularity and comprise more than 40% of all U.S. stock fund assets. The last two decades have seen the fastest growth for index funds, which held only 12% of U.S. stock fund assets in 2000. As passive investing has grown, new approaches have been introduced, including "smart-beta" ETFs.

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Date:Mar 1, 2019
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