On August 31, 1976 , John Bogle led Vanguard to create something new–the first index fund for personal investors. That fund grew slowly at first but kicked off a revolution that continues today.
In the course of about a week four major stock brokerages cut their stock trading commissions to zero. If you buy or sell stocks, zero commission is a pretty nice number…
Charles Schwab kicked off this zero commission battle, and stock market reaction or overreaction followed.
| Change | Firm | Profit From Commissions | Firm’s Stock Reaction |
| 1-Oct | Schwab | 4% | -10% |
| 3-Oct | TD Ameritrade | 25% | -26% |
| 7-Oct | E-Trade | 18% | -16% |
| 9-Oct | Ally Investing | 4% | -5% |
Fidelity didn’t jump on this bandwagon but they already created two zero expense ratio funds on 8/3/2018.
Why did these major brokers do all this? Do they just love us? Let’s look at another possible explanation–they have to compete on price now.
This competition really began in 1976 when Jack Bogle created the first truly mutual fund and the first publicly available index fund. The investors owned the fund, so the job of the fund manager was to minimize expenses, not maximize profits of the mutual fund manager. It took a long time for these wild new ideas to catch on but the low cost and (usually) superior returns of indexing have forced competitors to reduce their fees. Index funds are now up to 45% market share of all mutual funds.
When the Vanguard 500 Index Fund began, Bogle estimated that it would, on the average beat the standard fund by 1.5% (2% standard fund fee – .5% Vanguard fee). Actively managed funds now usually charge between .5% and .75% for their inferior performance, and passively managed funds have dropped even lower than they were.
| Mutual Fund Expenses by Year | Actively Managed | Passively Managed |
| 1976 | 2% | 0.50% |
| 2017 | 0.73% | 0.11% |
The amount of money that Jack Bogle left in customer’s pockets is huge and keeps growing (over 20 billion a year). Thanks, Jack.
