According to the Investment Company Institute, index strategies accounted for about 30% of mutual fund and ETF assets at the end of 2015. Indexing’s long-term growth is especially impressive considering that index mutual funds didn’t even exist until August 1976, when Vanguard launched the first one. That fund, originally named the First Index Investment Trust, sought to track the performance of the Standard & Poor’s 500 Index. Today, that fund is called Vanguard 500 Index Fund, and it has assets of about $240 billion.

Of Vanguard’s approximately $3.6 trillion in total assets under management as of July 31, 2016, about $2.5 trillion—nearly 70%—is in index mutual funds or ETFs. About 135 firms offered index mutual funds or ETFs as of June 30, according to Morningstar, Inc.

Coinciding with the rise of indexing has been a decline in costs for investors. In 2015, as per Morningstar, the asset-weighted average net expense ratio of all U.S. funds was 0.61%, down from 0.73% five years earlier. That’s a drop of more than 16%.

For index, or passive, funds, the asset-weighted average net expense ratio in 2015 was 0.18%, compared with 0.78% for active funds. The figure for Vanguard index funds was 0.08%*.

“Costs have come down across the industry in part because of the growth of indexing,” said Joe Brennan, a Vanguard principal and global head of equity indexing. “That’s been the biggest win, and it has flowed through the entire industry and opened the eyes of investors and many other managers to the importance of costs.”

Buffett’s bet on the 500 Index Fund

Further endorsement for the merits of indexing comes from Warren Buffett, the chairman and CEO of Berkshire Hathaway and one of the most successful investors ever.

In 2007, Mr. Buffett offered to bet any taker $1 million—with the money to go to charity—that over ten years and after fees, an S&P 500 index fund would outperform ten hedge funds of the taker’s choice. Protégé Partners, a New York money management firm, accepted the challenge. Its entry consisted of five funds of hedge funds, while Mr. Buffett selected Vanguard 500 Index Fund Admiral Shares.

According to Fortune, from the start of the contest on January 1, 2008, through the end of 2015, the 500 Index Fund has returned a cumulative 65.67%, compared with 21.87% for Protégé’s picks. Although there’s more than a year left to go, Mr. Buffett clearly holds a sizable lead and appears to be on track to win his indexing bet.

Mr. Buffett’s confidence in index funds is also on display in his 2014annual letter to Berkshire shareholders. On page 20 of the letter, he notes that his estate plan calls for putting 90% of his bequest to his wife in “a very low-cost S&P 500 index fund (I suggest Vanguard’s)” for her benefit.

*Source: Vanguard.

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

Past performance is no guarantee of future returns.