Our guest this episode is Robin Wigglesworth, the editor of Alphaville, the FT’s financial blog. He leads a team of three other writers in London and New York that dig into anything deeply nerdy or plain delightful that they spot in markets, business, or the global economy. He joined the FT from Bloomberg News in 2008. Robin is the author of Trillions, published in 2021, a book on the past, present, and future of passive investing and how it is reshaping financial markets. His new book, A Fabulous Debt, will be published in the fall.
Rick Ferri, a long-time Boglehead and investment adviser, hosts this episode. The Bogleheads are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki.
Since 2000, the Bogleheads have held national conferences in major cities across the country. In addition, local Chapters and foreign Chapters meet regularly, and new Chapters form periodically. All Bogleheads activities are coordinated by volunteers who contribute their time and talent.
This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax-deductible donation to the Bogle Center is appreciated.
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Transcript
00:00:10 Rick Ferri
Welcome everyone, to the 94th edition of Bogleheads on Investing. Today our special guest is Robin Wigglesworth, a Financial Times award-winning journalist and the author of Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever.
Hi everyone, my name is Rick Ferri and I am the co-host of Bogleheads on Investing along with Jon Luskin. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a nonprofit organization that is building a world of well-informed, capable and empowered investors. Visit the Bogle Center at boglecenter.net, where you will find a treasure trove of information, including transcripts of these podcasts.
So I have one announcement before we get started. Tickets for the 2026 Boglehead Conference are now on sale at boglecenter.net. The conference will be held from noontime November 13th through noontime November 15th at the Green Valley Resort and Spa in Henderson, Nevada, just a short ride from the Harry Reid International Airport in Las Vegas. And again this year, we have a fantastic lineup of guests. There’ll be many new faces there, as well as your Bogleheads’ personal favorites, including Bill Bernstein, Christine Benz, Mike Piper, Allan Roth, Jim Dahle, Jon Luskin, and yours truly. I hope to see you there.
My guest today is Robin Wigglesworth. Robin is the editor of the Financial Times finance blog Alphaville. He’s also the author of Trillions, the definitive book on the past, present, and future of passive investing. His new book coming out in the fall is A Fabulous Debt, an upcoming story of the bond market. Today our focus will be on Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever.
And Robin really digs into this topic. Now, I thought I knew a lot about the history of indexes, index funds, and ETFs, but I learned a tremendous amount by reading Robin’s book. He did a fabulous job digging into some corners of this market that just surprised me, and I’m sure will surprise you. So with no further ado, let me introduce Robin Wigglesworth. Robin, thank you so much for being on Bogleheads On Investing.
00:02:54 Robin Wigglesworth
I’m thrilled to finally be here.
00:02:56 Rick Ferri
Yes, we would have had you on earlier if I was more diligent about reading your Trillions book.
00:03:02 Robin Wigglesworth
I know that there are many books I’d probably read before my own as well.
00:03:06 Rick Ferri
It was on my list for a long time, so I’m glad I finally got around to reading it because it really filled in a lot of holes for me. I’d been in this industry for 40 years now and involved in the indexing part of it for 30 years and knew a lot of the people in your book, a lot of the stories, but not all of the story. And I think that what your book did was it really did a lot more in-depth research and interviews and captured the indexing revolution and the ETF revolution that took place and is still taking place.
So we have you as a guest to talk about Trillions, but I’m also going to have you on as a guest in the fall because you have another book coming out, A Fabulous Debt, and that book is going to be about the history and power of the bond market. So I’m going to give you a, a couple of minutes just to talk about that book, which will be coming out in the fall.
00:04:02 Robin Wigglesworth
Yeah, I love history and I love finance, and whenever I can merge the two, I’m a happy bunny. The bond market is often seen as a bit of the dowdy sibling to the more glamorous, racier stock market. You know, there’s so many books written about the stock market and stock market investing, but the bond market kind of gets a little bit forgotten. And even people that write about debt often just lumps — they just lump it all together, right, in one big blob, essentially.
But the reality is bonds are radically different. They’re a form of debt, of course, but they are radically different, and it matters. And it’s far bigger than the stock market. There’s probably close to $200 trillion worth of bonds out there and only $130 trillion worth of stocks, which is frankly pathetic, right? Why I think the bond market matters so much is that it’s actually bigger than the banking system. Over half of all global debt today is in the form of bonds rather than normal bank loans. And that is, is a huge shift in the fabric of the financial system that I don’t think people have grappled enough with. And I think a great story is a good way of telling that. So I start in Renaissance Venice, and in 1171 was the granddaddy bond issued kind of by accident, and its inventor actually got murdered on the streets of Venice. And then all to the present day with basis trades and convexity and frankly all the crazy stuff that happens.
00:05:29 Rick Ferri
Well, that’s great. I’m really looking forward to receiving that book and reading it and then having you back. Bonds are for gentlemen.
00:05:36 Robin Wigglesworth
Yes.
00:05:36 Rick Ferri
Stocks are for speculators.
00:05:38 Robin Wigglesworth
Exactly. I always say, look, my first job as a financial journalist was actually covering bonds and like Cat Stevens sang, “the first cut is the deepest.” So bonds is my first love. So it’s a bit of my love letter, an affectionate biography of the bond market.
00:05:51 Rick Ferri
I’m looking forward to that. But today we are discussing Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. As you well know, there’s been several books written about index funds over the years. I don’t think any of them are as concise as to the history and the evolution of it as yours is.
But the first book about index funds was written by, I’d say, Jack Bogle in 1994, Bogle on Mutual Funds. And that was followed up by a book by a fellow who was a lawyer from California. His name was Scott Simon and he wrote a book called Index Mutual Funds: Profiting from an Investment Revolution in 1998.
And in 1999, I put out my first book called Serious Money, which was a book about index funds. And I sent that to Jack Bogle, and he sent me back this card that said, oh, you wrote a great book. I couldn’t believe Jack Bogle actually wrote a card.
00:06:45 Robin Wigglesworth
That’s quite a thing to have, I have to admit. I’m very jealous.
00:06:48 Rick Ferri
I’ll even make you more jealous because one of the books that I wrote, he actually wrote the foreword on. So there.
00:06:54 Robin Wigglesworth
Ah, that, that — anyway, I don’t think I can top that, unfortunately.
00:06:56 Rick Ferri
The name of that book was The Power of Passive Investing, which has several chapters in here about the history, not as in detail as you get into, but 3 chapters on the history of indexes, indexing, and ETFs. And Jack did write the forward on that. I was fortunate. And funny, I had asked Burton Malkiel to write the forward at first, and he said, nah, I really don’t have time. So I said, okay, I’ll ask Jack Bogle. Malkiel said, well, why don’t you ask him to begin with? Why are you asking me? Right.
And then there has been several other good books. One that came out after yours was by Eric Balchunas, The Bogle Effect, was an excellent book. I had him on the podcast. But yours is a really detailed history and it casts a wider net, and you bring in a lot of people who normally don’t get mentioned, especially people like Larry Fink. Yeah, David Butler from DFA. I was surprised to see his name in the book. And the late Kathleen Moriarty, who was a wonderful person and a friend of mine.
You also linked the companies who were involved in index funds and ETFs together. For example, DFA had a strong relationship with Jack Bogle and Vanguard. Didn’t realize that until I read your book. And another example, a few years later when iShares went up for sale, I mean, Vanguard was looking at it, Fidelity was looking at it. I mean, so there’s an awful lot of relationships that were going on in this industry that I didn’t realize, but it’s all in the book. So if you’re a history nut like I am about this stuff, it’s an excellent book to read.
You structure the book with two things going on in the beginning of your book. It is a history of performance monitoring starting with Alfred Cowles. That’s one track that the book takes initially at the beginning, but then another track that it takes is the history of the indexes themselves and how they evolve, the benchmarks improve. So let’s go ahead and start then.
You have an introductory chapter talking about the bet between Warren Buffett and hedge fund manager Ted Seides, the million-dollar bet where Buffett says hedge funds can’t outperform the S&P 500 over 10 years, and they bet a million dollars to go to charity. And Buffett, of course, we know, won that bet. So that was the first chapter of the book, which, which was a good way to start.
But the second chapter now gets into the history. And let’s talk about this fellow Alfred Cowles, brilliant man back in the day. I mean, he, he was around in the 1920s. Like, talk a little bit about him and, and what he did to, to kind of get the ball rolling.
00:09:34 Robin Wigglesworth
Well, he was wealthy. His family was wealthy. That probably helped stoke the interest and ability to pursue lots of different fields. He was obsessed with measuring things. He loved measuring and ranking and counting. And he got interested in investing when he was recovering from tuberculosis.
He was a voracious reader and a student of everything. He signed up to all sorts of investment letters and read lots of investment books, started reading all the columns, but especially newsletters. There were essentially newsletters that people sent out to investors and they had all sorts of different systems essentially for how you can beat the market. And he discovered very quickly that they’re all useless. Some were horrifically bad.
And this made him curious. And you’re like, how do you measure this? And you realize nobody really knew what the market was doing. The Dow Jones Industrial Average had been around then for almost half a century, but it was a way of measuring a fairly narrow subset of industrial stocks when that was frankly all there was in the United States. By the time Alfred Cowles was recovering from TB, you know, it was a lot broader than that.
So he essentially started collecting lots of data. And finding out how the stock market did and also how various investors did. On his own initiative and with his own brain and basic understanding of statistics, he came up with what was probably at least the first comprehensive study I’ve seen of measuring how investors actually do. And lo and behold, they on average did abysmally badly.
00:11:11 Rick Ferri
Yeah, I’d like to talk about these numbers because when I wrote The Power of Passive Investing, I went back to Cowles and I looked at the performance that he came up with. And he studied from 1928 to 1932, so a 5-year period of time. And it was like 4 different studies that he did that he published in 1933.
He consistently came up with the same ratio of the surviving letters and of the surviving portfolios, meaning the ones that were around for the entire 5-year period, 1 out of 3 outperformed. 2 out of 3 did not outperform, they underperformed. And the 1 out of 3 that outperformed didn’t really outperform by much. And the 2 out of 3 that underperformed, 1/3 underperformed by some and 1/3 underperformed by a lot.
I found that to be interesting because as I— we go forward in this, that statistic keeps coming up over and over and over again. And then if you throw in survivorship bias on top of that, it actually is about 1/4 go away, 1/4 outperform, 1/4 underperform by a little, and 1/4 underperform by a lot.
I mean, as we go forward over the next almost 100 years and looks at many, many of the same types of studies over a 5-year period of time, these percentages that outperformed, underperformed by a little, underperformed by a lot, and went out of business didn’t change.
00:12:38 Robin Wigglesworth
Yes.
00:12:39 Rick Ferri
Now, in addition to this, Cowles was working on an index, and he was trying to get better data than the Dow Jones. So I want to go down that second track and talk about the creation of better indices to measure performance again.
00:12:53 Robin Wigglesworth
Well, so we had the Dow Jones Industrial Average. It has a lot of technical flaws in how it’s constructed. At the time, it was revolutionary. But the fact that it’s weighted by the price of companies rather than their size means that obviously you have a big weighting, you just happen to have a high share price and that doesn’t necessarily translate into a big company.
It was also by design narrow at a time when, you know, there were no computers, there were no calculators, you had to calculate everything by hand. So even simple indices with 30 members calculated daily was a full-time job of maybe even several people, right? So that’s why indices were fairly rudimentary for a long time.
They were started mostly as a service to readers. So the Financial Times, where I work, also started something called the FTSE. Other parts of the world, also newspaper groups. But this was considered fairly unglamorous, fairly backbreaking work, essentially. It was not lucrative at all, and it was hard to do.
And, you know, in many ways, you know, economists like them because we didn’t really have GDP measurements either. So some of the early stock market indices were kind of a way of measuring economic vim or economic health. And, and that’s sort of how they remain.
But the real change came with the computer, the first rudimentary computers, really in the ’50s and ’60s, because that is, you know, a quantum leap in the ability to calculate large groups of numbers. And obviously the computers back then are, you know, compared to like an iPhone in my pocket, is probably roughly a million times more powerful than the supercomputers of the ’50s. But at the time it was insane what they could do.
And there is this almost Cambrian explosion of financial innovation that comes along with the invention and the emergence of, of computers in the ’50s and ’60s. So a lot of the seminal financial works of financial economics, whether it’s, you know, a Gene Fama or Bill Sharpe or Harry Markowitz, there is no coincidence that they were also among the first people who learned how to code on these massive IBM mainframes. You could argue that the index fund— indices and index funds were kind of the first financial technology, the first marriage of computers and finance. Their first child was indices and index funds.
00:15:24 Rick Ferri
Back in 1951, Jack Bogle, when he was at Princeton, he had to do a thesis in order to graduate, and he did his thesis on the mutual fund industry. The, it was a very, very tiny industry at the time. In his thesis, which he was kind enough to send to me years ago when I asked him for it, he had all of his data for all the performance of all of these funds that went back into the ’40s. And he crunched these numbers and was looking at how well these active funds performed because they were all active funds back then you know, Massachusetts MFS and State Street and so forth. They were Wellington Fund as well. And he, he made a comment that, you know, none of these funds can really claim to outperform the market. And Jack claimed that that was the beginning of his thinking of index funds. I’m not sure if it was or not, but that’s what he claimed.
The funny thing is, when I went back and I looked at that data and I crunched that data using the indices that were available at the time, it came out to that exact same set of numbers that Cowles came up with. One quarter went out of business, one quarter outperformed, one quarter underperformed by a little, and one quarter underperformed by a lot. And as we go forward with these studies over the ’60s and the ’70s, those same percentages kept coming up over and over again because now more and more academics were starting to, to look at these numbers, and the indices started to get better and better.
Talk about the CRSP indices, the Center for Research in Security Prices, an affiliation with the University of Chicago. Why was that important, and, and how did that get started.
00:17:20 Robin Wigglesworth
As crazy as it sounds to us today, at the time in the ’60s, people didn’t think of stocks as something that gentlemen did. And let’s face it, it was mostly men doing the investing at the time. It was something a little bit tawdry, and it was probably, you know, to do with the legacy of the Great Depression and the great crash afterwards.
This is something that Merrill Lynch decides to change. So in the ’60s, Merrill Lynch wants to market stocks to ordinary Americans again. They think like, this is a great opportunity, we want to sell it, and we want to educate people and say this is a great long-term investment.
Incredibly, the SEC, the Securities and Exchange Commission, says no, you can’t do that. You need to prove that stocks are good long-term investment. So Merrill Lynch essentially hands a grant to the University of Chicago to set up something called the Center for Research in Security Prices to basically research whether stocks were a good long-term investment.
So essentially they started doing what Alfred Cowles had done almost as a hobby, but this time they actually had some computers. They had several brilliant business professors. So Jim Lorie, one of the great professors of University of Chicago, and his assistant Lawrence Fisher, who’s one of the first people who could really program, they painstakingly collected all stock market prices they could find in the United States going back as far as they could.
And this sounds like a humdrum task, but it was Herculean at the time because in practice, over the decades and centuries of American capitalism, lots of things that were called stocks weren’t actually stocks at all, they were bonds. Lots of things that were called bonds were actually stocks, were equity, they were ownership. So they had to painstakingly find out what was actually what, put together a time series, calculate dividends and so on, and put it all together on a magnetic spool that spun out for miles.
This took them 4 years. This was a huge project. I’m sure the Merrill Lynch people must have gotten incredibly frustrated with them, right? Slow academics and, you know, they’re just sucking up money. I think it cost $200,000, which was a fortune at the time.
But Jim Lorie and Fisher, they really came up with the goods. I mean, they struck gold. Because this data set is kind of where all indexes and index funds spring from. This is arguably maybe even the genesis moment of passive investing because it was so detailed, it was so unimpeachable. And to Merrill’s delight, it did show that US stocks did massively outperform bonds in the long run. Outrageously, even if you’d invested at the peak of the market in 1929, just before the Great Depression, you still would have made out like a bandit by ’64 when the results finally were in.
And for Merrill Lynch, this was fantastic. So they marketed the crap out of this. They, they had advertisements in almost every major newspaper in the US. They published books showing all these numbers.
What was kind of awkward though, and Merrill Lynch downplayed, was the fact that the data also showed that the stock market outperformed the large majority of professional mutual funds, the mutual fund industry that was kind of cropping up at the time, because some consultants had finally started collecting data on that. People hadn’t really systematically collected the data on how mutual funds and professional investors did, but by the ’60s, that came out at the same time. So this was both a hallelujah moment for the investment industry, but also maybe arguably the seeds of its eventual, if not demise, but its decline certainly.
00:21:01 Rick Ferri
I have to tell you a story. It was when I used to work in the brokerage industry in the late 1980s and early 1990s. You walk into any office and there were these mountain charts. There’s a big poster on the wall. It showed the return of U.S. stocks going up exponentially at like 10% per year, the return of bonds going up by much less, the return of T-bills, and then the return of inflation. And the idea of this chart was that when you have a client and they start to have some reservations about why you’re recommending stocks, you’re supposed to point to that chart and you’re supposed to say, “Well, this is why. Look, look at the rate of return on stocks.”
And then the broker would go, “And this is why we need to have these actively managed funds in your portfolio that have 8% commissions and 1.5% in fees.” You know, by the late 1990s, clients were asking, “Well, why don’t I just buy an index fund?”
00:22:01 Robin Wigglesworth
Well, I mean, and ironically, Jack Bogle is a colossus and deserves all the credit. It was very much post hoc. The reality is the first people that invented the first generation of index funds and not coincidentally at some second and third tier institutions at the time. They weren’t really thinking of an index fund. They were not efficient market zealots. They were just trying to give people a cheap and easy way of getting the market return. That was it.
They didn’t call it an index fund. They didn’t call it passive investing. It was just a product, a cheap and easily assembled product that they thought there would be some sort of a market for. Essentially because some people did just want that line, that market line, and they weren’t anti-active. Some of them were active managers, some of them were not, but that was essentially, it was an engineering challenge, a very narrow, modest engineering challenge that they solved. And the consequences would be far greater than frankly anybody ever envisaged.
00:23:05 Rick Ferri
As we look back on the lives of people like Bill Sharpe, and Gene Fama, two Nobel laureates. We find that their roots— I mean, their first jobs when they were research assistants was to try to find ways to outperform the market. Bill Sharpe, he learned computer programming as a way to try to figure out how to outperform the market. Gene Fama’s first job was to try to figure out investment strategies to outperform the market.
And these people who were— ended up being the pioneers of efficient market and beta, capital asset pricing model, so forth, discovered it’s really hard to outperform the market. And that’s how people like Gene Fama came up with his efficient market hypothesis. They were using computers back in the 1960s and early ’70s as a means to get a leg up, to outperform everybody else. And what they were finding, it’s very difficult to get a leg up. And that a market return is a good return.
The problem was, as Burton Malkiel wrote, you can’t buy the market, which he wrote in his Random Walk Down Wall Street book, which was first published in 1973. So now I want to go through the history of the huge effort that various people and companies went through to try to create an index product. Now, as you say, Jack didn’t invent this idea. He was the first to capitalize on it through Vanguard in an index fund for everybody, but he didn’t invent it. What came before Jack, the history of it in the late 1960s, early 1970s, that was trying to create a product that became known as an index fund?
00:24:51 Robin Wigglesworth
As the cliché goes, failure is an orphan, but success has many parents. And the index fund has many, many parents, some more intellectual and some more practitioners, the hands-on people that maybe put these ideas into practice. And I think in my view there are three of these fathers that stand above others.
One, Dean LeBaron at Batterymarch in Boston, a classic what we would today call a quant, or just a mega nerd essentially. Again, one of the people taught himself to code, taught himself computers because he was obsessed with it. And he, for him an index fund was just essentially an engineering challenge. So he came up with an index product, essentially a separately managed account. Unfortunately, no client took him up on that when he first launched it in the early ’70s. So I think it got its very first client in ’73 or ’74. So he argues that maybe he got there first but didn’t actually manage any money in the strategy. So it was designed but didn’t take up, take up immediately.
There’s another one called Rex Sinquefield in Chicago. He was an acolyte. He did study under Gene Fama when Gene Fama was a young wunderkind finance professor at Chicago. So he’s very much an efficient markets zealot. Rex Sinquefield himself describes himself as the Grand Ayatollah of efficient markets, and he was working at the American National Bank of Chicago in the stock picking and analysis division. He thought this was silly. Obviously, he was against, you know, an anathema to what he believed in. So he managed to convince the bank to convert one of its smaller, frankly worse funds into a de facto index fund.
What I think is the granddaddy, the, the original gangster, is the Wells Fargo In-Market Portfolio. So Wells Fargo, this is obviously the days long before Banks were deregulated, they operated state by state. Wells Fargo is not what we know it is today. It was, you know, a first-rate bank in San Francisco, and frankly not much more than that. But the, the leadership there kind of saw computers as a good way of, of maybe becoming a bit more. Asset management, investment was deregulated, you could operate across state boundaries, at least in the institutional space.
So they hired a brilliant MBA student at, at Salomon Smith Barney called John McQuown, Mac as he’s known. And Mac is one of the heroes of my book. This guy is incredibly driven, just wildly ambitious, and is exactly the kind of person you need who takes these grandiose ideas that had been percolating around in financial academia for almost a decade at that point and actually turn into reality. You needed somebody like that, and he did that at Wells Fargo against, you know, the ardent fighting of his own trust department. They eventually came along and became ardent index fan zealots themselves, but it took incredibly hard work to do.
So in 1971, they launched the first passive fund. It did not track the S&P 500. In fact, it tracked the entire New York Stock Exchange, 1,500 stocks at the time. And the weighting strategy was, let’s say, suboptimal. Essentially, it was a completely silly, badly designed product. So they had to rebalance all the time. It costs a lot. This was, you know, manual trading days. So it was, you know, a difficult product.
00:28:33 Rick Ferri
And the cost to trade back then was significantly higher.
00:28:36 Robin Wigglesworth
Huge. Yeah, no, I mean huge. And, and the only client they could get to join in to, to test this new product was the pension fund of Samsonite, the luggage company. And that was only because one of the scions of the family, who’d studied at the University of Chicago under Gene Fama, came back to the family business, saw how badly its own pension fund was doing, called up his professors at Chicago and asked, surely I learned all this efficient market stuff, random walk stuff. Surely somebody must be managing money in a sort of a theoretically sound way and was pointed in the direction of, of Mac and Wells Fargo.
And that was the genesis, the first index fund. It later became an S&P 500 index fund, but it was initially just a separately managed account with some Wells Fargo money and Samsonite money that tracked the New York Stock Exchange as a whole. But that, I think, is the tiny acorn from which this mighty oak grew.
00:29:37 Rick Ferri
Now, these people knew each other, and they were all operating independently, all trying to get to the same spot, which is to get some sort of a commercial product out there for institutional investors, not, not for retail investors at the time.
00:29:54 Robin Wigglesworth
And this is why Jack Bogle is rightly famous today, that he brought it to the, the masses but did not invent the index fund. In fact, there were several billion dollars in index funds long before Vanguard was ever sort of imagined even. And those were these three pioneers, and they did know each other, not fantastically well, but also ironically through the ferment of the University of Chicago and the CRSP Center.
So to make sure that this research that CRSP had come up with in the ’60s kind of percolated into the investment industry in the pre-internet era, CRSP would set up semi-annual conferences where they’d invite people to speak and listen to all this new research coming out. Mac McQuown was there almost every time. Dean LeBaron was there quite frequently. Rex Sinquefield definitely went a lot.
Jack Bogle also attended these seminars, essentially, on efficient markets and things like— and he didn’t necessarily believe in all that, certainly not at the time. But he was definitely drinking from that same intellectual well from Chicago that started the index fund. So he would have been, and he later on frankly pretended that he didn’t know about all these other projects.
00:31:11 Rick Ferri
I know, I know, I never asked him, but how could he not know?
00:31:15 Robin Wigglesworth
It’s very Jack, right? Look, we know for a fact he knew about it. Jack Bogle, as phenomenal a man as he was, was very keen, especially in the last 10, 20 years, of burnishing his legacy. I, I, I’d argue his legacy is so immense it needs no burnishing, but he would reappraise certain historical facts to better suit the legend of Jack rather than the reality of John Clifton Bogle. But he knew about all these things. He knew about all these people. In fact, his assistant at Vanguard when it was first set up was asked to call Mac, Rex Sinquefield, and Eden O’Barron, asked them for help when Vanguard was researching its first index fund.
00:31:56 Rick Ferri
I read that, I said, that’s interesting. That’s something that never came out. I spoke with Jack many times about the evolution of how you created this index, and it’s all, well, you know, I did this analysis.
I said, we need an index fund, and I went to the Wellington board, and you never hear about the fact that he reached out to these three people, and especially Sinquefield. Who gave them a lot of information, which ironically, when Rex Sinquefield co-founded DFA in the early ’80s, there was a little help from Jack to DFA, probably in a way a little payback for helping Vanguard start their first index fund.
Again, information in your book that wasn’t something Jack talked about.
00:32:40 Robin Wigglesworth
No, exactly. And look, for me, finding these little intellectual linkages was one of the real delights of researching this book because, I mean, one of my strongly, most strongly held beliefs is that we all stand on the shoulders of giants. We all pretend sometimes that all our triumphs are our own and our defeats is obviously somebody else’s fault, but the world isn’t like that. Even Sinquefield and LeBaron and, and Mac, they stood on the shoulders of giants that went before them. They stood on the work of Gene Fama and, and Harry Markowitz and Bill Sharpe and others, and they in turn stood on the shoulders of other economists that went before them. I thought it was interesting that the intellectual linkages were far stronger than previously acknowledged.
One of Rex Sinquefield’s classmates at the University of Chicago was David Booth. David Booth went to work for John McQuown at Wells Fargo and then later on founded Dimensional Fund Advisors with his old classmate Rex Sinquefield. The first idea was to set up essentially an index fund for small companies. Because at the time all the index funds were S&P 500 products.
And at Vanguard, when that was almost like a protean embryonic organization Jack Bogle— maybe this is the nuance in his defense, maybe he didn’t call these organizations directly, but he at least told or instructed his young assistant, his young quant at the time called Jan Twardowski, another quiet giant of the passive investing world, the guy that frankly designed the first index fund at Vanguard. He got in touch with these three other men to ask for their advice, and they were quite happy to give it because frankly, they weren’t rivals.
Batterymarch, American National Bank of Chicago, and Wells Fargo all targeting the institutional space and were managing a couple of billion dollars at the time. Vanguard was obviously targeting retail space, an area that a lot of people thought this couldn’t necessarily work because ordinary people would always want the hotshot stock picker. But he did that. And as you say, later on, Dimensional Fund Advisors and then Rex Sinquefield and David Booth were able to get their favor repaid because when they were setting up Dimensional Fund Advisors, they got Vanguard to help with lots of the back office stuff, introduction to lawyers, advice, and so on. And I do think it is nice that it’s the old philosophy of paying it forward, right? You, you do your— if you’re kind and help people, it will come back in some form or fashion at a later date.
00:35:05 Rick Ferri
I think that went on for about 3 years or so DFA using Vanguard’s back office. What, by the way, that’s what Vanguard was set up to do.
00:35:16 Robin Wigglesworth
Yes, these people all helped each other. They all knew each other to varying degrees, and they all helped together collectively in aggregate bring forth the greatest investing revolution we’ve ever seen in human history. And I think, you know, none of them could have done it alone. And that’s, at least for me as a humble journalist, that’s almost encouraging. It’s nice to know that it’s what we do together that can be really impactful.
00:35:42 Rick Ferri
And the naysayers about the retail marketplace not accepting indexing were correct.
00:35:49 Robin Wigglesworth
Yes.
00:35:49 Rick Ferri
But there’s a little twist there too. When the first Index Investment Trust, which was the name of the Vanguard 500, which it’s now called, was first brought to the market in 1975 it was sold through retail brokers, the Merrill Lynches and PaineWebbers back then.
Vanguard was only willing to pay a 6% upfront commission while all the active fund companies out there were paying 8%. So as a broker selling this, you have to admit that everything you’ve been telling your clients for as long as you’ve been in this business, all the funds that you’ve been selling, maybe don’t work. You know, go buy this index fund. You have to get over that hurdle, but then you are going to make less money by doing it.
Well, I was a broker for 10 years. What did you expect to happen? I mean, Jack thought they were going to raise $150 million.
00:36:44 Robin Wigglesworth
Yes.
00:36:45 Rick Ferri
Not in this lifetime were you going to raise $150 million, not from brokers who have very big egos and like to get paid. Vanguard raised a little over $11 million, but they were still able to launch. They weren’t able to buy all 500 stocks because they didn’t have enough money.
That didn’t happen until, I think, 1977 when they merged another large-cap fund into the first index investment trust, and then they were able to go out and buy. But I— the whole history of that, by the way, I did on podcast number 1. I had Jack Bogle on.
It was only a few months before he passed and he had wrote a book called Stay the Course. Went over a lot of the history of the actual launching of the fund. Interesting story in there. He was talking about the person who was actually buying the stocks was, I wanna say, a secretary who worked there part-time and the rest of the time she worked for her husband at a furniture store.
It really is fascinating to listen to, but it wasn’t successful. There was only like $110 million in the fund as late as 1981.
00:37:45 Robin Wigglesworth
Yes. With very little incentive to sell the Vanguard First Index Investment Trust, as it was called for a long time, you had no incentive to sell it. So it struggled. And I think this is part of the sort of Jack Bogle’s later year revisionism that he was always a big fan. The reality is that he launched an index fund because it was the one thing he was able to do.
00:38:08 Rick Ferri
Yes.
00:38:08 Robin Wigglesworth
Under the very restrictive terms of, of the, his divorce from Wellington.
00:38:12 Rick Ferri
I agree.
00:38:13 Robin Wigglesworth
His grandiose way of expressing this was that strategy follows structure, but it really— structure didn’t let him to do anything other than an unmanaged index fund. And that was only because the board essentially kind of with a nod and a wink, sure, yes, this is unmanaged. You’re not actually managing money. It’s unmanaged. It’s purely passive. Fine. Go and have your little side project. And he didn’t really care about the fund or throw himself into marketing it in the way we saw later on for a very long time.
I’ve talked to people that worked at Vanguard in the ’80s. Frankly, the saving grace for Vanguard, the money market funds. But that’s really what kept Vanguard afloat. They were able to start money market funds and then bond funds and a few other things. They also had, you know, some very illustrious stock pickers still, right? Like John Neff, who kind of kept it afloat. The index fund was, you know, it’s not even the ugly duckling at this point. It’s not anything that anybody really cares that much about, including Jack Bogle.
But it does start to gather assets almost organically, because by the ’80s, this research is starting to percolate more. There’s an entire new generation of people that have studied it in, in grad school, at business school, in economics. It just takes a long time for these ideas, especially when they’re almost heretical, to get into the public livestream. So by the ’80s, we are talking probably hundreds of billions of dollars globally in passive funds, in passive mandates.
In big— Wells Fargo became Wells Fargo, you know, eventually became BGI, Barclays Global Investors, Bankers Trust, Batterymarch. All these funds actually managed a lot of money in passive strategies, but it was only institutions because the pension funds could see this data and they realized this was clearly the optimal way for a lot of them to manage money. On the public side, it was just really slow. Ned Johnson, the head of Fidelity, famously said, who wants to be operated on by a mediocre surgeon? Like, you want the best! It’s so ingrained in us as consumers that, you know, if you’re gonna trust somebody with your money, you want the best people, not somebody who’s gonna be lazy or, perish the thought, passive. Even the word passive sounds bad, right? So it had a marketing problem, and yet it still started generating money a little bit in the ’80s, but really it’s in the ’90s.
00:40:34 Rick Ferri
Yeah.
00:40:35 Robin Wigglesworth
That things start going a little bit more nuts. The Vanguard 500 fund, when that started to generate assets, that’s when Bogle decided, oh wow, we have something here.
00:40:47 Rick Ferri
Right.
00:40:47 Robin Wigglesworth
Let’s turn our mind to this. Let’s turn this into a thing. They had gotten rid of sales loads. They’d gone no-load before quite early on. So they suddenly had quite a compelling offering. Like they were, the cheap competitor in a very high-cost mediocre industry, essentially.
00:41:02 Rick Ferri
And it’s no surprise that in 1994, Jack published his first book, Bogle on Mutual Funds, which reintroduced indexing to the general public. And then from there, that was the focus. They started looking at international funds, a bond fund, which they couldn’t even call it an index fund— the SEC wouldn’t allow them to. And then, as you wrote in your book, Jack went in to see Gus Sauter and said, Gus, what are we doing screwing around? Let’s, let’s launch a total market index. But now he’s on to it. Yeah, yeah, it took 15 years.
00:41:35 Robin Wigglesworth
And Gus Sauter, you’re right, Gus Sauter is an underappreciated hero in, in the passive investing story. I think like he was instrumental at Vanguard. He was one of those people that had studied the efficient markets. I mean, he also had an incredibly interesting career, but he was the guy that really ran that and drove that in the ’90s and started what is now, as you pointed out, this titanic $2 trillion fund. And that’s, that’s Gus Sauter.
So Jack Bogle does get the credit, and should get some of the credit, but I do think Gus deserves a, a large chunk of it too.
00:42:08 Rick Ferri
Gus is just a really great person, a really nice guy, very humble. Okay, we need to get into the second part of the book because we’re just burning up time here. And that is exchange-traded funds.
After the market crash of 1987, the failure of portfolio insurance, there needed to be a different way of trading a basket of real live stocks and doing it as a stock. Thus the evolution, or the creation of— they weren’t called ETFs back then. It was a security that was a basket of stocks like a closed-end fund but traded close to its NAV, its net asset value, because the fund manager could create new shares and redeem shares that were in the marketplace to keep the price close to its NAV, which was very different than closed-end funds.
Let’s talk about very early on, the players, the amount of work and education that had to take place at the SEC for them to wrap their hands around what is now called an exchange-traded fund, an ETF.
00:43:17 Robin Wigglesworth
So after ’87, the massive crash, the SEC published and then the Treasury and everybody got together with a sort of a big sort of blue ribbon report laying out what they thought went wrong. And in there, there was a section that talked about maybe if there’d been some sort of a product that essentially kind of buffered like an index product, a tradable index product that kind of buffered somehow between index futures and the cash market, that maybe this would have helped.
And quite a few financial engineers— and there were a lot of financial engineers on Wall Street by the late ’80s— realized this could be the, the kernel of something. The SEC was almost surreptitiously asking somebody to come up with something like this. I mean, you have various indexed tradable products. Obviously futures had been around for a while. People are trading like total return swaps and things like that.
But you had essentially at the American Stock Exchange a problem. They were getting squeezed by the New York Stock Exchange, the big brother, the big board, and the upstart NASDAQ. So they needed to find a new product, and they decided that maybe this is a way to do it.
So the main people at the American Stock Exchange were, were two people, two financial engineers called Nathan Most and Stephen Bloom. There are other people involved, Ivers Riley, Kathleen Moriarty, their lawyer, but essentially they decided to come up with a tradable index fund.
So it’d be a cash product, a bit like what the SEC wanted, but it would be tradable throughout the day. It would trade just like a stock, and they set about developing it. But as you pointed out, it was hugely complicated, both because of practical financial realities and incredibly awkward regulatory ones.
And many people in industry thought this was a terrible idea. And Nate Most actually did go to visit Jack Bogle and asked him for help. And Jack Bogle said, well, essentially, here’s where I think the technical problems are, but the biggest problem is I think this is a stupid idea that should never ever happen.
00:45:24 Rick Ferri
He called it giving gasoline to an arsonist.
00:45:28 Robin Wigglesworth
That sounds very Jack. He wanted people to buy the S&P 500 and hold it until they retired, and they were proposing something you might buy and sell within 5 minutes. It was quite understandably anathema to Jack Bogle, rightly so.
I think it was hard to go from what Nate Most was sketching out to him and what they were talking about in the early days and what we see in the world today. But it’s partially because of all the hard work they had to do to clear the, the regulatory thicket, as it were, to allow this to be bought.
00:46:00 Rick Ferri
This product called Standard & Poor’s Depository Receipts, or SPDRs, was finally filed with the SEC in 1990, but there was so much regulatory burden to get through, it didn’t launch until January of 1993. And it traded, it went over okay, wasn’t a huge splash, but it greased the skids for what would come in the future.
It took 3 years before another one was launched, and that was the S&P 400 MDYs, the mid-cap index. I was in the brokerage industry at the time. I started using SPDRs and MDYs for my clients as a long-term hold, which was almost forbidden.
00:46:47 Robin Wigglesworth
Oh wow.
00:46:48 Rick Ferri
Yeah, I’d read Jack’s book and I was enlightened, and I was looking for a way to move my clients over to index funds, but there was nothing available except extremely high fee, high commission S&P 500 funds through Dreyfus and other broker-sold products. And this was a solution. And so I started putting clients in SPDRs and MDYs to replace U.S. actively managed products. And that did not go over well with my bosses.
Okay, moving along. It took a while before other exchange-traded funds came out, and they came out in batches. The first group was called WEBS. So tell us about WEBS.
00:47:37 Robin Wigglesworth
In the same way that the first ETF, Spider, SPDR, was born out of a sort of an alliance of necessity between State Street and the American Stock Exchange. In the same way that essentially WEBS was born, it was actually Morgan Stanley had set up an index joint venture with Capital Group on the West Coast. It was called MSCI for Morgan Stanley Capital Investments. And MSCI had all these indices. They were creating lots of indices, but they realized, well, we kind of need some products to go along with them.
So Morgan Stanley tapped its relationship with Barclays Global Investors, BGI, out on the West Coast. So this was the old Wells Fargo. In fact, they’d pioneered the very first index fund and was by then a giant of indexing, although only solely in the institutional space. They’d also done all sorts of cool and funky things with systematic equity strategies and so on. So they were big. And had been first after a joint venture with Nikkei in Japan. They’d been acquired by Barclays, the UK bank, and had become a giant, one of the biggest asset management firms in the world.
But frankly, even BGI did not get enormously excited about this idea of a joint venture with MSCI to start these new ETFs, as people were starting to call them then. They just weren’t that crazy about it. It’s kind of a retail product. They thought it didn’t really fit with what they do. They were complicated. And frankly, it wasn’t as if the first ETFs were a roaring success either. But they did it almost as a favor to Morgan Stanley.
And there’s a reason why Morgan Stanley essentially offloaded its share in this WEBS joint venture to BGI for a purely nominal sum. Nobody really believed in this. And the name WEBS, it was a World Equity Benchmark. So the idea was that they were international ETFs. Was really just like a, a cheeky way of a nod to SPDR, spider and webs, right? That was like, that’s how far naming conventions go in the financial industry.
And nobody really cared about it for a long time until you suddenly had a few executives at BGI that realized that, you know, Barclays was already a giant of the institutional investing space, and ETFs and this WEBS could be the kernel of them becoming a giant in the retail space as well.
00:50:04 Rick Ferri
I recall the day that iShares— you know, that they changed the name to iShares— launched, I want to say, 16 ETFs, and they were all to these different indices— small cap, large cap. I think they were using Russell indices, if I’m not mistaken, and it was huge.
All of a sudden, it was no longer just the S&P 500, the S&P 400, and country baskets. It was now styles. And they came on the market. And to me, this was the beginning of the revolution that took place with exchange-traded funds, when iShares launched these style indices.
00:50:55 Robin Wigglesworth
Well, so the two crucial people at BGI at the time, I think, were Patricia Dunn, the CEO, and Lee Kranefuss, who took over, you know, what became known as iShares. They were the ones that, you know, Kranefuss was the slightly mad genius, I’ve heard him described, who had immense drive and ambition. And Patricia Dunn was the one that could see this and frankly back him and got money from Barclays and from the board of BGI to essentially what was lost, probably a ton of money to begin with.
Because it’s like, you and I know how hard it is to just go into something adjacent, but going from being a purely institutional relationship manager, essentially selling to pension plans, sovereign wealth funds, private banks, and then selling to the retail world, it’s just— it’s a huge leap. It requires a whole change of mindset, which is why iShares was set up to be something different.
And Lee Kranefuss, I think, saw quicker than almost anybody else, certainly at places like State Street that had pioneered the ETF, that the future of the ETF wasn’t just like a tradable index fund, essentially like the S&P 500, but actually being able to carpet bomb the entire investment landscape with tradable products. So styles, sectors, sizes, the whole panoply of potential investment products you could package up.
Because in reality, you and I know that like it isn’t just the fact that active managers underperform in the long run in like the stock market. It’s in every single subsector as well. And a lot of the fund managers that do outperform really always have done so by having some sort of secret style tilt that’s either explicitly or implicitly embraced.
So this is why style ETFs, the iShares, they started and then Kranefuss basically signed up all the biggest indices. He signed for exclusive use of their brand because the indices had become kind of the shorthand for these styles, for these markets. And like the Russell 2000 was the small caps index. It’s actually, I’d argue, actually a really bad small caps index.
00:52:57 Rick Ferri
I agree.
00:52:58 Robin Wigglesworth
But it was the small caps index. It was the shorthand. So he signed an exclusive deal to basically have that.
So he essentially squatted like an intellectual property toad over all these different parts of the investment world and systematically built this up. And it must have cost a ton of money because you have to build the sales forces, you have to do all the marketing. And people of our generation remember how aggressively iShares used to market itself, and they had to do so because they had to catch up, right? They had no retail cachet. Nobody knew who they were. Nobody knew who BGI was.
They suddenly— then people realized that ETFs can be just a tradable index fund, but they can be also be an investing tool. They can be used strategically and tactically. And that meant that actually a lot of people started embracing them that frankly would never have been considered potential use— users just a few years earlier.
00:53:50 Rick Ferri
So now enter Gus Sauter. So Gus is looking at this, and Jack unfortunately had to retire because he had a heart condition and had a heart transplant. So he steps down.
Gus is watching this and saying, okay, first of all, we can’t use those indices. I mean, we can’t launch ETFs against those because they’re locked up. So Gus creates his own methodology. And I remember when the paper was published, it was like 2000 or 2001.
And he takes this methodology— small cap, large cap, and how to migrate from small cap to large cap, and how to migrate from value to growth— he takes this whole methodology and he goes to CRSP and he says, create indexes out of this. The paper explained how to do it.
They take it and they create the indexes, and then Vanguard comes in with what they called Vipers. Wasn’t a great name, they ended up dropping it. Yeah, but they come in with style and size ETFs, and they also get a patent on the funds that they currently had, like the Total Market Fund and their S&P 500.
They create a patent where they can create a share class of ETFs within that fund. And the patent was for like 20 years so that no one else can do this. And now, because of Gus Sauter, in my belief, Vanguard is now in the ETF industry, which allows Merrill Lynch and Paine Webber and Wells Fargo advisors to use Vanguard funds, which is the thing Jack never got.
00:55:29 Robin Wigglesworth
I remember talking to Burton Malkiel about this. I mean, he was at the board of Vanguard for a very long time, was a good friend of Jack Bogle and huge fan. Burt was very articulate in explaining why he was— supported the ousting of Jack Bogle from Vanguard. The reality is that sometimes you need a founder, a certain person who’s perfectly suited for that era, and Jack Bogle was Vanguard. I mean, his spirit is still very much in the walls there, but increasingly by then it was very clear that the organization had started outgrowing or needed to maybe have a different type of CEO. And that was obviously very awkward to do and very painful, frankly, for everybody involved. I mean, I’ve talked to a few people, they’re all frankly emotionally scarred from that era. But I think Jack Brennan changed the organization, made it more professional, and could see the benefits. But still, like, this is an organization formed in such Jack’s image that I think even with Gus Sauter championing ETFs, they were very slow to appreciate its power.
00:56:34 Rick Ferri
Yeah.
00:56:34 Robin Wigglesworth
But I think they needed to manage Jack fully out, unfortunately, to truly embrace the index fund 2.0.
00:56:43 Rick Ferri
A couple of other companies who missed the boat.
00:56:47 Robin Wigglesworth
Yes.
00:56:47 Rick Ferri
On ETFs. Fidelity. Boy, did they miss the boat.
00:56:51 Robin Wigglesworth
I mean, you talk about Vipers, but Spartans were even worse, right? That’s just, it really shows how little Fidelity didn’t want it sort of tarnishing their active brand, as it were. We can’t even call them Fidelity funds. And it’s very easy to make excuses for them. I think like the really, the one that like, I, hard to say they missed the boat, but State Street should be.
00:57:15 Rick Ferri
Oh yeah, they had it. Oh yeah, absolutely.
00:57:16 Robin Wigglesworth
Even after it was all, all very, very obviously a big thing, State Street kind of slept on it for a long time.
00:57:25 Rick Ferri
You know, the funny thing was when Barclays got into a little financial trouble after the financial crisis, and they had bought Lehman Brothers back then, and they, and they needed to spin off iShares. I mean, they needed to find a buyer for iShares. That was Fidelity’s opportunity right there.
00:57:45 Robin Wigglesworth
And Vanguard. Vanguard sniffed around as well because they knew their ETFs were underpowered, and they realized they had to catch up, and this was a potential way. But for Vanguard, you know, given its ownership structure and, and Barclays’ need for cash upfront now, it meant that the advantage was always going to be to almost a de facto cash buyer. And buyer eventually, not Fidelity and not any of the other people that came sniffing around, or the private equity firms that actually had bids accepted for iShares was BlackRock.
And BlackRock’s trump card was that it was obviously listed, so it could pay in shares and fairly liquid shares, and they would buy all of BGI, all of Barclays Global Investors. And I think that was the genius move.
00:58:28 Rick Ferri
It was. You did a good job with Larry Fink and talking about how he was instrumental in bringing on iShares and, and growing that brand. He saw the, the value there.
00:58:38 Robin Wigglesworth
He put building an institution before building his own personal wealth. And we elevate the inventors, the Jack Bogles, the Mac McQuowns. These are people that I also love, but sometimes you do need people who’s just gonna get shit done. And Larry Fink is somebody who’s very commercially minded, is extremely brilliant. I’ve talked to lots of people that even don’t like him and will say he has complete mastery of every part of his business.
00:59:04 Rick Ferri
And we could go on for 2 hours here because we can get into all kinds of things you have in your book, but we’ve run outta time. Thank you so much, Robin, for being on Bogleheads on Investing.
00:59:13 Robin Wigglesworth
Thanks so much for having me on, Rick, and I’m really looking forward to digging into this through the bond market next.
00:59:19 Rick Ferri
This concludes this episode of Bogleheads on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, visit BogleCenter.net, Bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit. Join one of your local Bogleheads chapters and get others to join. Thanks for listening.
