The Invention of Index Funds and the Growth of the Middle Class

The S&P® 500 is a household name. But few Americans may realize its profound impact on how Americans build wealth.

If you own a 401(k) retirement savings account or are entitled to a pension from your company, the odds are high that your portfolio or company’s pension fund includes shares in an “index fund.”

Index funds “track” a particular index – such as the S&P 500® – by holding stocks that mirror the makeup of the index. Since their invention in the mid-1970s, index funds have become popular investments for Americans looking for a relatively low-risk, inexpensive way to invest in the market.

Among the best known index funds, for example, are the Vanguard 500, which was the world’s first index mutual fund and still among the world’s largest, and the SPDR® S&P500® – an “exchange-traded fund” (ETF) that trades like a stock.

But what made these investment products possible is the invention of the index itself. In 1923, Standard Statistics (now Standard & Poor’s) published its first stock market index, which covered 233 U.S. companies and was computed weekly. Today, S&P publishes one million different indices, including the S&P 500®. Other countries have also developed their own benchmark indices, such as the Nikkei Index in Japan and the British FTSE 100.

Alex Matturri, Chief Executive Officer of S&P Dow Jones Indices, argues that the concept of indexing is a transformational innovation in the history of finance. Indexed investment products, he says, opened up the stock market to ordinary Americans and “democratized” opportunities to build wealth. According to Matturri, index funds now account for about 12 percent – or more than $2 trillion – of the value of the publicly traded companies in the S&P 500®.

Continued at Republic 3.0…

About Anne Kim