The Little Book of Common Sense Investing, Updated and Revised

Chapter SixteenIndex Funds That Promise to Beat the Market

The New Paradigm?

SINCE THE INCEPTION OF the first index mutual fund in 1975, traditional index funds (TIFs) designed for the long-term investor have proved to be both a remarkable artistic success and an incredible commercial success.

In previous chapters, we’ve demonstrated—pretty much unequivocally—the success of index funds in providing long-term returns to investors that have vastly surpassed the returns achieved by investors in actively managed mutual funds.

Given that artistic success, the commercial success of indexing is hardly surprising. (Although it was a long time coming!) The principles of the original S&P 500 Index model have stood the test of time. Today, the lion’s share of the assets of TIFs are those that track the broad U.S. stock market (the S&P 500 or the total stock market index), the broad international stock market, and the broad U.S. bond market.

Assets of these traditional stock index funds have soared from $16 million in 1976 to $2 trillion in early 2017—20 percent of the assets of all equity mutual funds. Assets of traditional bond index funds have also soared—from $132 million in 1986 to $407 billion in 2017— 13 percent of the assets of all taxable bond funds. Since 2009, TIF assets have grown at an 18 percent annual rate, slightly faster than their ETF cousins.

Success breeds competition.

In many arenas, indexing has become a competitive field. The largest managers of TIFs are engaged ...