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 The first index mutual fund in the world tracked the S&P 500. The first index futures? The S&P 500. Index options? Exchange-traded funds (ETFs)? You guessed it: the S&P 500 and the S&P 500. In other words, the history of the S&P 500 is, to some degree, the history of the index investing industry.
Recently, Standard & Poor's (S&P) celebrated the 50th birthday of the S&P 500 index. As part of the celebration, S&P convened a panel of financial industry giants to discuss the major trends of the past, present and future. Globalization, derivatives, hedge funds and, of course, indexes and index products were just a few of the topics that the panelists deliberated.
The panel was a financial industry dream team—just take a look at this lineup:
David Blitzer—Managing director and chief investment strategist for Standard & Poor's, and the person responsible for the management of all S&P indexes.
John Bogle—Former CEO of Vanguard Group, creator of the very first index mutual fund and author of numerous best-selling books, including the most recent one, The Little Book of Common Sense Investing. Time magazine named Bogle one of the world's 100 most influential people.
Kathleen Moriarty—Partner with the law firm of Katten Muchin Rosenman, and a key player in the early development and creation of the Standard & Poor's Depository Receipts (SPDRs), the first ETF (along with many, many other ETFs).
Floyd Norris—Chief financial correspondent and a well-known financial columnist for The New York Times.
Robert Shiller—Professor of Economics at Yale University and a fellow at Yale's International Center of Finance. Shiller is also co-founder of Macro Markets LLC, which has worked with S&P to create home price indexes.
Introducing the panel was Terry McGraw, chairman, president and CEO of the McGraw-Hill Companies, parent company of S&P. The panel was moderated by Journal of Indexes editor Jim Wiandt. The following is an edited transcript of the session.
Terry McGraw (McGraw): When the S&P 500 was born in 1957, it ushered in a new era in finance, and it was one of the great success stories in business and commerce. One of an index's foremost qualities is that it has to be an essential metric and benchmark, because you can't manage what you can't measure. The creation of the S&P 500 then was a huge breakthrough, providing an essential tool for so many: investors, analysts, managers, financial media and the general public. And of course, it also enabled so much academic research, which has furthered our understanding of market dynamics and given us new perspectives. It spurred the evolution of new products ... So what will the future hold? I'm eager to find out from our panelists.
Jim Wiandt (Wiandt): The S&P is really fundamental to indexing. When you look at all the things that are going on in the index industry now, from futures and options to the first mutual fund and the first ETF, the S&P has always been the foundation. David, why don't you lay the groundwork for the discussion and talk a little bit about the history of the S&P 500 and where it's come since you were first involved.
David Blitzer (Blitzer): In 1957, two or three things came together. First, there was interest in an index that was much broader than the Dow Jones Industrial Average, which had only 30 stocks. Second, the idea was it'd be nice if we could calculate during the trading day instead of only at the end of the day. Third, and most importantly, computers were creeping in on the horizon. The S&P 500 was the first index calculated on a computer during the trading day, and that was seen as something fairly revolutionary at the time.
It's absolutely incredible how the 500 was interwoven with financial history. The whole idea of asset allocation really came together in some work that was done in the early 1950s by Harry Markowitz. The capital asset pricing model came out in 1964. That led to the idea of using an index for investment. Jack [John Bogle] was the first one who really did it, and really did it in a way that made it accessible to everybody instead of just one or two institutions or something like that.
John Bogle (Bogle): Well, I thought I'd actually prefer to get to the future by talking a little bit about the past, and the past is, I think, quite intriguing. In 1951, I wrote my senior thesis at Princeton on the subject of the mutual fund industry. And in that thesis I wrote, "After examining the mutual fund industry and its record, mutual funds can make no claim to superiority over the market average."
And so when Vanguard was started, our idea was to have the lowest cost in the industry. Vanguard was started in 1974, and we started business and operations in the spring of 1975. The first thing we had on our directors' agenda for this brand new company was the idea of bringing out the index funds. And it took a lot of persuasion. I looked at the record of the mutual fund industry over the previous 30 years and it showed the index would have beaten the average mutual fund by, oh, one and a half percent a year. So we went out looking for underwriters. They were very hard to find because the idea of a fund that wasn't managed, generated no reciprocal business and didn't use Wall Street's research … well, it was not an immediate hit, one might say.
We didn't even consider another index than the S&P 500. It had everything we needed: It was investable. It was trackable. It represented the institutional and the individual portfolio. It was the portfolio of choice—the opportunity set if you will—for individual investors as a group. And above all, it was market-capitalization-weighted. That means you don't have a lot of transactions, its turnovers run about 4 percent a year, you don't generate a lot of taxes and you can run it at a very low cost and a very low—in fact a zero—turnover cost. So that was the choice.
The moment came and we went out doing road shows for the Wall Street investment firms. A lot of eyes glazed over, from audiences that were not a tiny fraction of the first row here tonight. The underwriters had filed for a $200 million offering, and at the end of the time period for the underwriting, they had raised $11,300,000. And I said, $11.3 million, we can't even buy all 500 stocks! They said, "Do you want us to take the money back?" And I said, "No, we have the world's first index mutual fund. Let's go with it." And so we did.
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2007
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