You can thank Thomas Edison for the light bulb casting light in your home, Henry Ford for your affordable, mass-produced car, and Apple’s AAPL, +0.62% Steve Jobs for the astonishing computer in your pocket.
And Jack Bogle, who died Wednesday? The low-cost mutual funds he helped pioneer at Vanguard aren’t as sexy or dramatic as other inventions. And you can’t really touch or see them. But their effect on everyday lives has been enormous.
Bogle’s low-cost index funds, and the imitators they have inspired, may have saved ordinary Main Street Americans a staggering $250 billion, or more, in mutual fund fees over the last forty years.
That is based on data from industry sources, including Vanguard itself and the Investment Company Institute, the mutual fund’s trade organization. It involves no heroic assumptions. It compares the amounts of money invested in low-cost index funds and exchange-traded funds over the years, and the amount in extra fees investors would have paid if they’d held that money in regular, higher-fee mutual funds instead.
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It doesn’t even count the money saved on high-fee funds as they’ve been forced to cut their fees to compete. (Industry numbers show they’ve cut their fees by about a third.)
Nor does it count all the extra money investors would have if they had simply reinvested these savings in the stock and bond markets using yet more index funds. Throw that into the mix and estimates from Vanguard on Wednesday night suggested that index funds may have left Main Street Americans some $400 billion richer.
See also: Nobel Prize winner Richard Thaler may have added $29.6 billion to retirement accounts
These are rough calculations, involving plenty of estimates and assumptions. But they do, at least, show the order of magnitude of Bogle’s achievement. The industry legend, who helped transform investing for Main Street America, died age 89.
Index funds don’t attempt to pick stocks, but instead just invest in all of the stocks in the entire index — such as the Standard & Poor’s 500-stock SPX, +1.32% — which is weighted according to the stocks’ market values. As a result, the investors don’t have to pay for an expensive fund manager, or a team of analysts, or support staff. This saves investors in aggregate a bundle. And few sacrifice performance. Repeated studies have shown that few active money managers can beat the market by enough to make up for their costs.
Also see: Jack Bogle, mutual-fund industry agitator, got the last laugh
There are now about 450 index mutual funds with around $3.4 trillion in assets, ICI says. There are also 1,800 exchange-traded funds, also with around $3.4 trillion in assets. (Most ETFs also operate as low-cost index funds, except that unlike traditional mutual funds you buy and sell them like shares through a brokerage). Index equity mutual funds have average expenses of just 0.09% of assets a year, says ICI. Investors in exchange-traded funds pay on average a little more, or 0.21% a year.
Fees on actively-managed funds, where managers attempt to pick stocks? Far higher. They’re around 0.55% a year on bond funds, and 0.78% a year for stock funds, says the ICI. At the end of the last millennium, before index funds really took off, those stock funds charged on average well over 1% a year.
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