Forty years ago, the thought of buying a stock index fund was ridiculed. Why would anyone be satisfied with an investment that promised nothing more than the same return as the market?

Later this year, however, US stock index funds may, for the first time, control more in assets than mutual funds run by stock-picking managers trying to deliver better returns than an index like the S&P 500.

The surge in popularity for index funds is a product of their lower fees, better performance and the preaching of John Bogle, the founder of Vanguard Group, which launched the first index mutual fund for individual investors in 1976. Bogle died January 16 at 89 after pushing for years to keep costs down and widen access to index funds.

Initially derided as ‘Bogle’s folly’, index funds have become the default way to invest for so many people that some critics now worry about unintended, market-distorting effects that could ultimately hurt investors and society.

US stock index mutual funds and exchange-traded funds (ETFs) now control close to US$3.6 trillion, according to Morningstar. They have nearly erased the once-massive advantage held by actively managed funds, which currently have a total of US$3.77 trillion in assets.

Last year, investors pumped a net US$206.5 billion into US stock index funds and pulled US$174.1 billion out of actively managed ones. Experts say sometime this year US stock index funds will likely eclipse their rivals in assets. In other categories, such as bonds and foreign stocks, index funds have more catching up to do.

Yes, some actively managed funds do better than index funds every year: 36 per cent did so in the 12 months through June, according to the most recent count by Morningstar. But it can be tough for investors to find the few who can do so repeatedly.

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