Massive passive: 50 years of the index fund
Happy birthday to the index fund, which this month turned 50 years old — looking fitter, feistier and more controversial than ever.
Five decades ago, John “Mac” McQuown, a headstrong former farmhand from Illinois, led a team of brilliant iconoclasts at a Wells Fargo skunk works that cooked up ways to use newfangled computers in finance. Among the things the Management Sciences unit helped birth were Fico’s famous credit scores and Mastercard. But the greatest was the index fund.
At one point McQuown had six future Nobel laureates of economics on his payroll. “That tells you how much brain power we focused on the problem,” he reminisces. The first clunky iteration was born in July 1971, with $6m from Samsonite’s pension plan. Soon afterwards, two other unorthodox financiers — Rex Sinquefield at American National Bank of Chicago and Dean LeBaron of Batterymarch — launched the first S&P 500 index funds.
The success of passive investing has been breathtaking. There is now over $16tn in index funds of various stripes, almost twice the size of the combined private equity, venture capital and hedge fund industries. Throw in non-public internal passive strategies, and we are probably talking of well north of $25tn.
