The Index Fund Revolutionized Finance — But at What Cost?
A new book chronicles the rise of passive investing, the pioneers who made it a dominant force in finance — and its potential downsides
When the renowned investor Warren Buffett bets a million dollars on an outcome, it’s rarely a good idea to take the other side of it. In 2008, the hedge fund manager Ted Seides decided to try his luck anyway, taking on Buffett’s public wager that an index fund that tracked the U.S. stock market would outperform any group of hedge fund managers over the next decade. Seides selected five funds-of-funds that were invested in over a hundred hedge funds. The race wasn’t even close. By 2018, the Vanguard 500 index fund had returned a cumulative 126 percent compared with the fund-of-funds paltry 36 percent. The eye-opener is that Buffett, celebrated for his value investing stock-picking approach, chose to invest in a “passive” index fund.
This striking episode was symbolic of a broader shift in the investment industry, with money pouring into index funds and away from actively managed funds. It’s only appropriate then, that it forms the opening of a new book on the rise of the index fund. In Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance, Robin Wigglesworth, the global finance correspondent at Financial Times (FT), does an excellent job tracing the history of the index revolution, from its unassuming birth to the $26 trillion behemoth it is today. While the book largely celebrates the intellectual and practical contributions of some of the brightest and most forward-looking financial minds of the last few generations to establishing index funds as a dominant force in financial markets, and the benefits that index funds have bestowed on investors, Wigglesworth also cautions of the unintended consequences and negative side effects.
Wigglesworth’s history of index funds is anything but a dry read. He writes with a witty, pull-no-punches tone that I got a taste of even before I had delved deeply into his book. Early on, I noticed a small discrepancy with a…