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September 11, 2011

Investing with indexes is attractive.

First Index Investment Trust, the first index mutual fund, was launched August 31, 1976.  John C. Bogle, the founder of The Vanguard Group, established the index fund on the premise that passive equity management would produce superior results over active management.  He believed that index funds would incur substantially lower costs.  He believed, and still believes, the managed mutual fund expenses are too high.  The higher expenses place a significant drag on the performance of managed funds.  Index funds’ expenses would have lower advisory fees, operating expenses, sales loads, portfolio transaction costs and excess taxes than managed funds. 
Exchange Traded Funds (ETFs) have further reduced the expenses.  Mr. Bogle is not a fan of ETFs.  He is concerned that many investors do not understand the make-up and limitation of the various indexes available.  They also would not realize that funds with similar names would be different.  That is, not all indexes are the same.  Furthermore, a lot of ETFs use strategies that are not appropriate for everyone.
There was much skepticism initially about the fund.  The fund was renamed the Vanguard 500 Index Fund, and today is the largest mutual fund.  READ MORE
David Blitzer’s article in the July/August 2011 issue of “Journal of Indexes” makes some strong arguments for the use of indexes.  “The prevalence of bubbles and the absence of prices tied to dividends, earnings and discount rates make investing with indexes attractive.  Besides being lower cost, index investing is attractive because bubbles are hard to recognize and even harder to predict, so picking the right stocks, is difficult.  Further, given how fickle a bubble can be, investors seek the protection offered by the diversification inherent in broad market indexes.” READ MORE 
James Zweig in his October 10th Wall Street Journal article, “The Age of ‘Macro’ Investing”, stated “Because so many mutual-fund managers failed to protect their shareholders against calamities of the past decade, index funds-which passively replicate the performance of entire markets-have come to dominate the scene.” READ MORE
The use of index investing continues to grow.        

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