An Exciting Year for Boring Funds. Indexes Are Booming.

Investors who were savvy enough—or lucky enough—to know that these stocks would boom have done very well. But they’re not the only ones who have had a good year.

It turns out that some of the other big winners of 2023 were investors who didn’t bother to do deep analysis of individual stocks. They’re people who put their money in two very boring—but very important—investments. And they deserve to have a little fun with their numbers, too.

After all, there are more of those investors every year. These investments have been increasing their market share every year for the past 10-plus years, in good markets, bad markets, and mediocre markets.

What are they? Index funds. Specifically,
S&P 500
and total stock market index funds.

Yes, index funds certainly lack the excitement of individual stocks. But unexciting as they are, they’re becoming increasingly popular.

Look at the chart accompanying this column and you see that these index funds have been increasing their share of the open-end stock fund market.

According to numbers that I got from Morningstar, as of Nov. 30, the two index funds’ combined share of the open-end stock fund market totaled 17.5%. That’s up from a combined 8.76% at year-end 2013. In other words, their market share—you can groan now—has doubled in just under 10 years.

The second chart shows net inflow numbers—how much new money investors are putting into these two classes of index funds. Even though total market funds have less than two-thirds as much in assets as S&P 500 funds, total market funds’ inflows from 2013 through 2022 were larger than S&P 500 funds’ inflows: $391.3 billion to $383.2 billion.

Even if you include the first 11 months of this year, with S&P 500 inflows much bigger than total market fund inflows, their totals are close to even.

A major reason that S&P 500 funds have considerably more assets than total market funds is that the first S&P fund available to retail investors was created some 16 years before the first total market fund was launched.

That first S&P fund, as many of you probably know, was launched by Vanguard in 1976 by Jack Bogle, Vanguard’s founder.

The initial offering was a fund flopperoo. According to Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever, by Robin Wigglesworth, Vanguard hoped to raise $150 million in the fund’s initial offering. But the fund, which some came to call Bogle’s Folly, raised only $11.3 million.

In fact, the First Investment Index Trust, as it was then called, couldn’t afford to buy all of the S&P 500 stocks. So it bought only 280 of them.

But after growing agonizingly slowly, S&P 500 funds began to catch on. As of Nov. 30, they had more than $2.7 trillion—that’s trillion, with a “t”—in assets, according to Morningstar.

A big selling point for these funds is that many investors and investment managers use the S&P 500 as a benchmark. So, if you can buy an S&P fund with a tiny management fee, the low cost lets you beat most results posted by investment managers, whose costs and charges are considerably more than the 0.04% that Vanguard charges for its Admiral shares. Many of Vanguard’s competitors charge similar low fees.

A total market fund, which is far more diversified than an S&P fund, involves buying thousands of stocks. For example, Vanguard’s total market fund owned 3,761 stocks as of Nov. 30, compared with 505 in its S&P 500 fund. (There are more than 500 stocks in the S&P 500 fund because some companies, such as Alphabet, have two share classes.)

Vanguard launched the first total market index fund in 1992. By then, index funds were beginning to be accepted. Vanguard’s total market fund had $113 million of assets by the end of its first month, according to Morningstar, and just kept growing. Three years ago, it became the nation’s first trillion-dollar fund.

While the world of S&P 500 index funds is wildly competitive, the world of total market funds is dominated by Vanguard. Its total market fund had $1.39 trillion in assets as of Nov. 30, giving it a market share of more than 80% of such funds.

How did Vanguard get so far ahead?

“First, they were early advocates of the superiority of total market over S&P 500 funds,” says Russel Kinnel, Morningstar’s director of manager research. “Second, they dominate target-date funds, and the total market fund is a core holding in their target-date funds.”

Expect S&P 500 and total market index funds to keep gaining market share. They aren’t exciting or interesting. But they offer simple, low-cost, one-stop shopping. Which is why even though I began buying individual stocks almost 20 years before Vanguard launched the First Investment Index Trust, my two biggest holdings these days are S&P 500 and total market index funds.

Judging by all of the numbers we’ve been looking at, I’m sure not alone.

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