The investment lessons from the Vanguard 500 Index fund's 50-year history

By Mark Hulbert

The Vanguard 500 Index Fund, which at the end of last month celebrated its 50th birthday, is just as strong today as it was in 1976.

That's worth emphasizing, since the typical pattern is for new investment strategies to eventually lose their ability to outperform the competition. Not the Vanguard 500 index fund (and similar broad market-index funds), however, which have consistently outperformed the vast majority of Wall Street advisers over the long term.

What this means going forward: If you had shifted your entire equity portfolio into the Vanguard 500 Index Fund, and then did nothing else for the next few decades, your performance rank would almost certainly be above the 80th percentile. Where else in life can you perform that well by sitting on your hands?

This investment implication is not immediately obvious from the mutual fund's performance rankings, however. According to Morningstar Direct, the Vanguard 500 Index fund VFINX is in 43rd place among the 93 mutual funds for which data are available back to August 1976. That puts the fund solidly in the middle of the distribution rather than near the top.

What the Morningstar ranking does not include, however, are all the mutual funds that existed in 1976 but went out of existence at some point along the way. I have been unable to determine the precise number of such funds, but it's in the hundreds. Based on data from Morningstar and the Investment Company Institute on how many funds stopped trading in the last 50 years, I calculate that the Vanguard 500 fund's performance rank among all funds (both surviving and non-surviving) is somewhere between the 81st and 90th percentiles.

My calculation assumes that nonsurviving funds were behind the S&P 500 at the time they stopped existing. That's a reasonable assumption, according to Lawrence Tint, one of the earliest players in creating index funds. Tint was the former U.S. chief executive of Barclays Global Investors - the organization that created iShares (now part of BlackRock).

Tint noted that funds that go out of existence almost always do so because of having too few assets under management to be profitable - and that, in turn, is almost always caused by poor performance.

A reality check on my estimate of the Vanguard 500 Index fund's 50-year performance percentile comes from the track records of investment newsletters that were calculated by my performance auditing firm. The Hulbert Financial Digest has performance data back to 1980 - not quite 50 years ago, but close. Of the 49 model portfolios that existed then, only four still exist today and are ahead of the market over the entire period. On the assumption that the non-surviving portfolios were behind the market when they went out of existence, the Vanguard 500 Index fund's performance rank among the newsletters is at the 92nd percentile.

The bottom line? As we celebrate the Vanguard 500 Index fund's 50th birthday, we discover that it is the gift that keeps on giving to each of us as well. Its performance history is so good that it dares you to try doing any better.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert

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09-08-26 0946ET