The 500 Index Fund, originally named the First Index Investment Trust, became the world’s first index mutual fund when Vanguard founder John C. Bogle launched it in 1976. In the 40 years since, the fund has won multitudes of converts and spawned countless imitators and competitors.

When the 500 Index Fund eyes its 40-year-old reflection, it’s not inclined to spruce up its look or update its image. The fund’s mandate has always been, and always will be, to capture the returns of large-capitalization U.S. companies. Indexing’s reputation has vastly improved with age as more and more investors and advisors embrace the concept.

“Indexing becomes more relevant every day,” Vanguard Chief Investment Officer Tim Buckley said. “The case for indexing is stronger than it’s ever been. As long as active managers keep expenses high, we expect indexing to continue to be successful, especially in this low-return environment.”

Evolution of an industry

Simple yet sophisticated. Average yet extraordinary. Passive yet progressive. Inexpensive yet invaluable. Rational yet radical.

Indexing can be described in many such ways and can provoke a range of reactions. One thing, however, is clear: It has transformed the mutual fund industry and made investing accessible and affordable for millions around the world.

When Mr. Bogle introduced that first index fund, it was met with yawns from investors and derision from competitors. The fund was ridiculed as “Bogle’s Folly,” and indexing itself was even assailed as “un-American.”

Today, indexing is a cornerstone of the mutual fund industry and has even led to another investment innovation, the exchange-traded fund (ETF). And Mr. Bogle, who served more than two decades as Vanguard’s CEO and chairman, is an industry icon who recently celebrated his 65th year in the investment business.

“Indexing is the purest expression of low-cost investing,” said Joe Brennan, a Vanguard principal and global head of equity indexing. “Indexing is diversified. It’s potentially tax-efficient. The biggest headwind that investors face is cost, and indexing reduces costs in many ways.”

Indexes are bundles of securities that reflect the performance of a segment of the market. They can cover any segment, from the entire U.S. stock market to U.S. Treasury bonds to emerging-market bonds to non-U.S. real estate investment trusts. The concept of an index fund is straightforward: to track the performance of one of these benchmark indexes as closely as possible after accounting for costs.

Index funds are inherently cheaper to manage and own than actively managed funds, and they typically generate fewer taxable distributions. Primarily because of their low costs, index funds as a whole over the long term have generally outperformed a majority of actively managed funds.

“The case for indexing is based on the belief that investors in aggregate are unable to beat the market, because they are the market,” said Michael Buek, a Vanguard principal who oversees U.S. trading for the company’s Equity Index Group and was the 500 Index Fund’s portfolio manager from 2005 to 2016. “Their active returns are significantly eroded by costs. Therefore, investors who own the entire market at a very low cost through indexing reduce the hurdles that make successful active management so difficult over the long term. It’s timeless.”

People, portfolios, and process

Index funds have come a long way in 40 years. Along with being their pioneer, Vanguard has been a low-cost leader and industry innovator.

Contrary to some misconceptions, an index fund won’t run on autopilot. Successfully operating one requires portfolio managers with deep expertise. And there’s much more to indexing than tight tracking of a benchmark.

“As everyone knows, indexing is about getting that market return,” Mr. Buckley said. “Getting the market return might be the easiest part of it. Getting the market return and not negatively impacting the market as you trade is the part that nobody gets to see. Our team here is expert at reducing market impact. They are also wise about avoiding unnecessary taxable distributions.”

Over the decades, Vanguard has refined its indexing methods, enhanced its systems, increased its offerings, and expanded its capabilities around the globe. Vanguard, which now has 12 international offices, began indexing overseas in 1996 in Australia and now offers index funds and ETFs in more than 180 countries.

The groups headed by Mr. Brennan and Ken Volpert, a Vanguard principal and global head of fixed income indexing, operate and manage money in Valley Forge, Pennsylvania; London; and Melbourne, Australia. As Mr. Buckley has said, “The sun never sets on our trading day.”

“We have people doing hands-on trading in the markets using sophisticated techniques and tools,” Mr. Brennan said. “This is a huge benefit to all our portfolios around the globe. If you have an international or global portfolio that has a portfolio manager in one region, its assets are being traded and its management assisted by our experts around the globe. You’re getting the power of the whole global team flowing through to the results of that global or international portfolio.”

Vanguard offers more than 100 index mutual funds and ETFs, and its Target Retirement Funds are index-based. Index funds are also at the core of Vanguard Personal Advisor Services®, which launched last year and provides guidance to tens of thousands of investors.

“Vanguard has taken a simple concept—which is tracking a proxy for the market, the 500 Index portfolio—to one where we actually give people the full market return, with funds like Total Stock Market Index, Total World Stock Index, and Total Bond Market Index,” Mr. Buckley said.

Along with offering index funds that track broad market benchmarks, Vanguard’s lineup includes index funds and ETFs that track benchmarks of every type of investment style, size, and industry sector.

“We’re giving people access to return streams they may not have gotten otherwise,” Mr. Buckley said. “We’re also giving investors and advisors the ability to slice the market and build portfolios in different ways. They don’t have to just buy the total market—they can buy sections of it with low-cost indexes.

“Vanguard has evolved indexing from just one portfolio to giving you a global market, and also components of the global market, so you can build your own portfolio. Index funds can be the foundation for your portfolio. They’re building blocks. Through index funds, you can have a globally diversified portfolio of X stocks and Y bonds for just Z%.”

And it all began with a single Vanguard fund 40 years ago.


Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Vanguard ETF Shares are not redeemable with the issuing fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.