The Vanguard Group

Vanguard is an American investment management company that offers mutual funds and other financial products and services to individual and institutional investors in the United States and abroad. Company headquarters are near Valley Forge, Pennsylvania. Its founder John C. Bogle is credited with the creation of the index fund. Vanguard is unusual among mutual-fund complexes in that it is owned by the funds themselves: each fund in the group contributes a set amount of capital towards shared management, marketing, and distribution services. The company claims that this structure orients its management better towards the interests of shareholders, as compared with other mutual-fund sponsors, which are expected simultaneously to make a profit for their outside owners and provide the most cost-effective service to funds and their shareholders.

The Index Fund Philosophy

John C. Bogle conducted a study in which he found around three fourths of mutual funds did not earn any more money than if they invested in the largest 500 companies simultaneously, using the S&P 500 stock market index as a benchmark. In other words, three out of four of the managers could not pick better specific "winners" than someone just holding a basket of the 500 largest public U.S. companies. The managers could pick specific stocks which would do as well as picking the 500 largest stocks (essentially doing as well as random chance would dictate), but the cost to pay their expenses, as well as the high taxes incurred through heavy trading, resulted in underperforming the index. This is empirical evidence for the Efficient market hypothesis.

The argument at the time was that it was impossible to invest in an index. John Bogle used this information and attempted to create a way that one could invest in an index. Having founded Vanguard as a broker-sold mutual fund company, he eventually turned the company into a no-load fund firm (meaning that the buyer pays no sales commission — called a "load" — when buying or selling fund shares) and in 1976 introduced his first index fund. This first index, called the Vanguard 500 (which invested in the 500 companies that made up the S&P 500), has since out-performed many other competing large mutual funds. Over 100 billion dollars are invested in this mutual fund, and Vanguard has since created other index funds that focus on stocks in particular industries, countries, or companies of varying size (such as "small-cap" or "mid-cap" indexes). Bogle retired from Vanguard in 1999 and was succeeded as Chairman by John Brennan. Vanguard has continued to follow Bogle's emphasis on index funds and low expenses to share owners.

Since its founding in 1975, Vanguard has grown to become the world’s largest pure no-load mutual fund company. While mostly known for its low cost index funds, Vanguard also offers a variety of low cost, actively managed mutual funds and a line of Exchange Traded Funds (ETF) known as VIPERs. Vanguard now also provides brokerage services, variable and fixed annuities, financial planning, asset management, and trust services.

Vanguard contracts out management of its actively managed funds to various investment firms, and sets a portion of the management expenses paid by shareholders based on the fund's performance. Its oldest fund is the Wellington Fund formed in 1928 and operated by Wellington Management Company.

Vanguard Index funds are a particularly popular investment vehicle among financial scholars, such as university professors in the areas of economics and finance.

Enthusiasts of the Vanguard approach to investing maintain a forum at Morningstar.com's discussion website, where self-identified "Vanguard Diehards" offer advice. As well, they debate the finer points of investing: active vs. passive fund management, pure index approaches, asset allocation issues, information on stock, bond, and other funds. Entry to the forum can be achieved by visiting this link.

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The Index Fund Philosophy

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