The first index fund for the general public was a minor sensation. Until then, investing on the stock market was only reserved for institutional asset managers or wealthy private individuals. That changed on August 31, 1976, as Sebastian Külps, head of Germany and Northern Europe at the US asset manager Vanguard, explains.
"The focus shifted from trying to beat the market to broad market participation. It was understood that investing could be easier, more transparent and cheaper, and millions of people had the opportunity to build wealth through indexed investing for the first time."
Invest in a basket of stocks
In 1976, John Bogle, founder of the investment company Vanguard, set a milestone in the democratization of investing. Instead of paying expensive fund managers who often underperformed the market, it was suddenly possible to invest in a specific index - i.e. a whole basket of stocks.
The forerunner of exchange-traded ETFs was born, according to Hermann-Josef Tenhagen from the consumer portal Finanztip. "It's a good entry-level product for people with no prior knowledge, and it's an inexpensive product. You can invest in stocks inexpensively and don't have to pay such high fees for it."
Investors don't have to make decisions all the time
ETFs also relieve investors of many complex decisions, says Vanguard Germany boss Külps. "Investors don't have to constantly think about sectors, individual stocks or the right time to enter the market." A fund invests in a very broadly diversified manner, invests relatively inexpensively and has a certain level of transparency.
“The ETF has therefore become an absolute success story and helps many people build long-term wealth,” said the Vanguard Germany boss to the ARD financial editorial team.
Because the idea from 1976 was as simple as it was ingenious: Instead of looking for a needle in a haystack - i.e. the one stock with high price potential - you buy the whole haystack. So the entire index. In this specific case: a replica of the S&P 500, which brings together the 500 largest listed US companies.
The first ETFs started in Germany in 2000
While initially you could only buy the index funds from the provider itself, the so-called ETFs - i.e. exchange traded funds - are traded on the stock exchange. The first global ETF launched in Canada in 1990, the Toronto 35 Index, while the first major US ETF, the SPDR S&P 500, or SPY, launched in 1993.
In Germany, developments followed seven years later, remembers Ascan Iredi from Plutos asset management. "Around the year 2000, Hypovereinsbank copied the product from the USA and introduced it in Germany. On the DAX, the Eurostoxx and the Stoxx 50. Three products that dominated the market for years and were, so to speak, the gateway drug to the subject of ETFs for Germany." The first three ETFs were listed on the Xetra stock exchange on April 11, 2000, and more and more have been added since then. There are said to be around ten thousand ETFs worldwide. And the big asset managers earn billions from it.
Danger: Is too much money flowing into the same stocks over and over again?
Capital market expert Iredi sees a great danger in the run on ETFs. "A strong focus on stocks that are getting bigger because money that flows into the major indices always flows into the same stocks." This would fuel trends from the same stocks and leave the breadth of stocks behind. “Which means that individual stocks become very expensive,” says Iredi. This particularly applies to the tech stocks in the Nasdaq, which are part of many ETFs.
From an investor's perspective, ETFs are considered a low-risk investment, precisely because individual shares are not purchased, but are broadly diversified. In addition, there are only low fees, unlike asset managers or actively managed funds. According to the Vanguard Germany boss, the invention of the index fund has saved investors around a trillion dollars in fees over time.
