Vanguard just announced the 30th birthday of what it calls the first index fund for individual investors: First Investment Trust. This fund is now the Vanguard 500 Index Fund, with $108 billion in assets.
According to index fund supporters, the low costs of these funds will lead to higher returns over a long time period. Through June 2006, two months shy of its 30th birthday, Vanguard 500 Index Fund had a 12.00 percent average annual total return, according to Lipper, while the average large-cap core fund (with neither a growth nor a value bias) returned 11.92 percent.
Although this looks like a toss-up, two factors tip the scales to index funds:
1. Taxes. After-tax, the contrast might be even more favorable for index funds, which generally can minimize capital gains distributions to shareholders, who’ll owe tax on those distributions.
2. Measurement. The industry average is subject to what industry insiders call “survivorship bias.” That is, the only funds to have survived over 30 years are the best performers; the laggards no longer exist so they don’t have 30-year records. This circumstance pushes up the industry average returns.
Over the long haul, an index fund likely will outperform the average mutual fund, before and after taxes.
