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Chapter 11. Mutual Funds > Equity Indices

Equity Indices

In 1976, John C. Bogle, the man generally credited with turning Vanguard into a powerhouse mutual fund company, opened the first retail index fund called the First Index Investment Trust. That fund is now called the Vanguard 500 Index fund (www.vanguard.com), and in October 2003, its assets were a whopping $79 billion. It has more assets than any other mutual fund on the market. Since Vanguard introduced its S&P 500 index, over 678 funds have been introduced. Most track the S&P 500, but some track the Europe, Australia, and Far East Index (EAFE) while others track the Russell 2000 or other popular indices.

There are two clear advantages to investing in index funds: lower fees and tax efficiency. The management fees and the trade costs for index funds are dirt cheap. For example, the Vanguard 500 Index fund charges only 0.18 percent per year. That's less than 2/10 of 1 percent. Index funds are very tax efficient because they are passively managed, which means they buy or sell a security only when one is added or deleted from the underlying index. This tax efficiency is a critical issue to those in high tax brackets.


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