By Ben Gilbert and David Rosenthal
Most people know that Vanguard offers low-cost index funds. Some know that Vanguard is itself owned by those fund investors collectively. But few realize that this clever corporate structure is why the funds are so low cost. And why Americans have access to low-cost index funds at all.
The Vanguard Group manages the largest index funds in the world -- nearly $12 trillion in passive index assets. It is the single largest owner of the majority of corporations in the S&P 500.
And together with the other large index-fund companies like BlackRock, State Street and Fidelity, it owns an estimated 24% of the entire U.S. stock market. Passive index funds are a behemoth hiding in plain sight.
Vanguard has a clever strategy. As it grows its assets and gains economies of scale, it shares that surplus value back with its customers -- fundholders -- in the form of reduced fees instead of keeping those dollars for itself. This playbook is akin to another great company that we studied on Acquired in 2023: Costco. Costco built a tremendous competitive advantage by capping its profit margins and sharing scale benefits with customers in the form of lower prices. As Costco scales, it becomes increasingly difficult for competitors to match its famously low prices. Vanguard is essentially the Costco of finance but taken to another level: thanks to its corporate structure, it captures no profits.
But how did this happen? Index funds owned 0% of the stock market in 1975 when Vanguard started. Today, they are the entrance to investing for millions. And Vanguard -- and now other fund managers, too -- offer this wildly attractive investment product for a fee that is often less than 0.05% annually, or a mere $5 on a $10,000 investment.
It all starts with the founder, John C. "Jack" Bogle.
In 1967, Bogle was the president of the respected mutual-fund firm Wellington Management Co. The arrival of the stock market's go-go years in the late 1960s drove Wellington to merge with aggressive Boston-based fund manager Thorndike, Doran, Paine & Lewis. Their newly adopted strategy worked for a few years, until the market crashed in the early 70s, leaving Wellington overexposed and bleeding assets.
Amid the chaos, Bogle's idealistic streak blossomed. He slowly became obsessed with the idea that high fees were a moral wrong perpetrated on American investors by an ethically bankrupt Wall Street fund-management industry. Internally, he began agitating to offer a more fair deal to the firm's investors amid all the losses. His merger partners from Thorndike, Doran, Paine & Lewis were not interested in this direction, and they held significant votes in the combined firm.
This disagreement came to a head at a January 1974 board meeting, when Bogle was asked to resign. He refused, and was promptly fired from his own company, by the very partners he had personally recruited.
Bogle's career appeared to be torpedoed.
He tried one last desperate chance to save it, proposing something that seemed like pure lunacy at the time. What if the Wellington funds -- which were separate legal entities -- broke away from their manager and assumed self-governance like the 13 British colonies had 200 years earlier? (Fittingly, Vanguard itself would be founded in Valley Forge, Pa.) This radical new fund structure would, ironically, offer a communist way to participate in the fruits of capitalism. Fund management would operate solely in the interest of its customers, pocketing no profits of its own since it would have no separate shareholders!
His proposal went over like a lead balloon. Such an idea had never been tried before, and the Wellington mutual funds' conservative board of directors were loath to rock the boat. But they did grant Bogle a small consolation prize.
He could form a new subsidiary firm, wholly owned by fund shareholders. However, that firm could only take on back-office responsibilities like legal, compliance and accounting. It would not be permitted to offer investment advisory services. Those lucrative operations would remain the domain of Wellington Management.
Bogle took the opportunity, paltry as it was. In his words, it offered " my last best chance to resume my career." He formed the new company -- The Vanguard Group -- on Sept. 24, 1974.
It didn't take long for Bogle to identify a sliver of daylight in the mandate bestowed upon his new firm. What if he could manage money...without actively advising on how to make investments? Was it possible to "passively" manage a fund where investments were made without any discretion of the investment manager?
The timing was right -- just the previous fall, Nobel Prize-winning economist Paul Samuelson had published an article in the Journal of Portfolio Management in which he described the futility of trying to find active stock pickers who could systematically outperform the market year after year. Samuelson suggested that somebody should set up a fund to track the whole S&P 500 -- and if it kept fees to a minimum, it could outperform a large portion of active investment managers.
Bogle ran the numbers: in seven of the prior 11 years, if you had owned the whole S&P 500 with no fees, you would have beaten half the active managers. And over the full decade, from 1964 to 1974, you would have outperformed 78% of them.
Bogle's big insight was not that a passive index of the entire market provided magically better returns. After all, its returns are by definition average! It was that running this passive strategy would be inexpensive, and thus wouldn't require charging large fees to the investor clients. And it was precisely these low fees, compounded over large periods of time, that created the outperformance compared with active managers.
If an actively managed fund's annual expenses averaged 0.75% to 1.0% and trading costs averaged about 1% (conservative estimates for the time), then it had to beat the market by 1.75 to 2 percentage points before costs just to match the market's return after costs. If, over time, the stock market returns (say) 10% annually, then the average actively managed fund has to return at least 12% (or 20% more!) just to stay even with it!
And conveniently for Bogle and for Vanguard, because this passive strategy technically required no "investment advisory services," the fledgling firm was permitted to do it.
Vanguard was also uniquely set up to operate with ever-lower fees as it scaled -- because it was owned directly by fundholders and thus did not need to generate any excess profits.
And that's exactly what happened. The company has cut fees over 2,000 times since its start in 1975, going from an average firmwide management fee of 0.68% to 0.06% today.
As a result, Vanguard has saved investors more than $500 billion in fees over the five decades since its founding, according to Eric Balchunas, author of "The Bogle Effect." That figure is so astonishing that it warrants reframing: if one were to consider this wealth transfer from the financial sector back to the investing public as philanthropy, it would be the largest donation in human history. Furthermore, Vanguard's ferocious price competition has, in turn, forced other fund firms to cut their fees -- putting even more money back in investors' pockets.
Vanguard feels almost like a different type of capitalism -- one with pure alignment between shareholder and customer. And that alignment exists because of an anomaly in business history: there was no financial incentive for Bogle to create the company in the first place! It exists solely because he was enough of a capitalist to dedicate his life to the world of investing, but not enough to benefit from owning the company he founded. An exceedingly rare combination.
Acquired's full episode on the history and strategy of Vanguard will be available in Apple Podcasts, Spotify or any podcast player starting on May 18.
(END) Dow Jones Newswires
May 15, 2026 11:30 ET (15:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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