Don't stop believing in the benefits of indexing

There is no sure thing in investing. Markets fluctuate, sectors surge and then fade, and past performance has no bearing on future success. These uncertainties can be cold comfort for investors who are saving for retirement, putting their kids through college, or starting a business.

Indexing has provided an antidote to some of the unpredictability and expense of investing. With a straightforward mission of capturing market returns, index funds have paved the way for millions of investors to access those returns at minimal expense.

The story of indexing is still being written at Vanguard. We are proud of the role we've played in indexing's rise, and we see even more opportunities for it to help investors. Some benefits of indexing are well-known, while others are less recognized. All should be celebrated for how they've changed the investing landscape.

Four ways indexing has become a force for good

Low costs. Indexing is synonymous with low-cost investing, and for good reason: It lets you keep more of your returns. Furthermore, the success of indexing (and Vanguard) has pushed costs down across the industry. Over the last 15 years, the weighted average expense ratio for index funds has dropped from 0.28% to 0.09%, while the weighted average expense ratio for actively managed funds has fallen from 0.83% to 0.53%. Our research shows that without the option of index funds, investors would have paid nearly $200 billion in additional costs since the early 1990s.

Diversification. Index funds offer global diversification for pennies on the dollar. Before Vanguard pioneered the index mutual fund in 1976, investors had limited ability to easily diversify their portfolios. The median number of stocks held by U.S. mutual funds in 1969, for example, was only 44. Today, investors can gain exposure to every stock in the United States for 0.04%, or a globally diversified bond and stock portfolio for just 0.07%. I never imagined that level of diversification at that price point when I joined the business 28 years ago.

Simplicity. As more investors rely on advisors or institutions to manage their wealth, indexing has unlocked another advantage: simplifying the portfolio construction process. Advisors can focus their time on more value-added work. Instead of searching for a "winning" stock, advisors can use index funds as building blocks for their clients' portfolios, dedicating more time to the goal-setting and behavioral coaching that can make or break a client's long-term financial outcomes.

Good governance. As indexing grows, so does our advocacy for good governance. We have a responsibility to investors to protect their interests and maximize the value of their investment over years and decades. Ensuring that the companies our funds invest in are well-governed and have an eye on the long term (instead of the next earnings call) is core to our responsibility as index fund managers.

Indexing is just getting started

There's been a drumbeat in recent years that indexing has grown too big. I'd say indexing is not big enough. Read my full post here.

Notes:

All investing is subject to risk, including possible loss of principal.

Diversification does not ensure a profit or protect against loss.