The Wall Street Journal recently published a series of articles under the title “The Passivists.” Highlighting the merits of a passive investment approach, authors tackle topics such as the fruitless endeavor of trying to pick winning stocks to the “Do Nothing All Day” investment approach taken by Nevada’s $35 Billion pension fund. For each article we provide a synopsis as well as our own additional comments to build upon the great work highlighted in this series.
The S&P 500 is the most well-known market index in the entire world. It is comprised of the largest (based on market capitalization) 500 companies within the United States. It was also the inspiration for the first index fund, which was created by John McQuown, David Booth, and Rex Sinquefeld in 1973. John Bogle, founder of the Vanguard Group, went on to create the first retail index fund in 1975, which also tracked the S&P 500. His original fund is now the largest mutual fund in the entire world, boasting over $260 Billion in assets as of September 30, 2016.
These pioneers were often criticized and called names like “un-American” given their core belief that investors were better off accepting market returns than trying to beat them. Time has only reaffirmed the genius and forward thinking brilliance of these amazing men. As reported by Morningstar, $1.3 Trillion in assets have flowed to index funds over the last 3-years compared to their active counterparts who have seen a 25% decrease in their total assets under management over the same time.
Obviously one of the most sought after index funds are the ones that track the S&P 500 given its popularity and access to some of the largest and most influential companies in the world. As assets have grown in S&P 500 tracking funds, naturally the overall ownership of companies that comprise the S&P 500 has increased for passive assets. In fact, since 2005, ownership has more than doubled, starting at 4.6% in 2005 and currently 11.6%. The active management ownership of the S&P 500 has pretty much been stagnant over the same time period. In 2005, they owned 16.7% of the total S&P 500 market value and currently sit at 17.2%.
Certain companies that are currently constituents of the S&P 500 have more passive ownership than active ownership. Some of the names include Prologis Inc. (PLD), Pitney Bowes Inc. (PBI), Public Storage (PSA), Frontier Communications Corp. (FTR), Clorox Co. (CLX), Alcoa Inc. (AA), Goodyear Tire & Rubber Co. (GT), and General Mills Inc. (GIS).
As performance continues to dwindle for their active counterparts, we expect that time will only further prove that the titans of the passive investment movement were on the side of “right” for now almost over 40 years.
You can find the original article published in the Wall Street Journal here.
About the Authors
Tom Allen is an Accredited Investment Fiduciary (AIF®), Certified Cash Balance Consultant (CBC) and a Chartered Financial Analyst (CFA®) Level III Candidate. Tom received his Bachelor of Science in Management Science as well as his Bachelor of Art in Philosophy from the University of California, San Diego.
Mark Hebner - Founder, Index Fund Advisors, Inc.
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.