Episode Summary
Executive Summary: The episode traces the origin of indexing and ETFs back before Vanguard to Mac McQuown and Wells Fargo’s research in the 1960s and early 1970s. McQuown explains how data, computers, and academic collaboration led to the conclusion that broader, market-cap-weighted portfolios outperformed concentrated active bets, laying the groundwork for index funds and later ETF innovation.
Main Topics: The true origins of the index fund (Priority: 5/5): The hosts frame the discussion around Sam Potter’s reporting that the index fund’s real birth predates Vanguard and Jack Bogle, pointing instead to Mac McQuown’s work at Wells Fargo in the 1960s and early 1970s. Academic research and the birth of modern portfolio thinking (Priority: 5/5): McQuown describes collaborating with Chicago School economists and other academics, using data analysis to test assumptions about stock returns, diversification, and market efficiency. From intuition to data-driven investing (Priority: 5/5): A key theme is the shift from subjective portfolio construction to evidence-based investing, enabled by early computing and large datasets like CRISP and Japanese market data. Wells Fargo’s role and the regulatory roadblock (Priority: 4/5): Wells Fargo created early market-fund and index-like products, but regulatory and legal constraints, especially the 1971 ICIV decision, prevented full commercialization. Vanguard, Bogle, and the spread of indexing (Priority: 4/5): McQuown explains that Wells Fargo shared its research with Jack Bogle, helping Vanguard popularize the index-fund model even though the idea originated earlier. ETFs as a regulatory and structural evolution (Priority: 3/5): The episode argues ETFs were not a fundamentally new invention but an amalgam of closed-end and open-end fund structures that regulation had kept apart. Current views on passive investing and market structure (Priority: 4/5): McQuown dismisses fears that passive investing will distort markets, arguing that active/passive distinctions are blurry and that market prices still depend on continuous buying and selling.
Key Arguments: The index fund did not begin with Vanguard; it emerged earlier from Wells Fargo’s data-driven research led by Mac McQuown. Diversification works: the more names in a portfolio, the better the expected risk-adjusted outcome. Market-cap weighting is superior to equal weighting because equal weighting overexposes investors to riskier stocks. The same diversification logic held across markets, including both U.S. and Japanese datasets, suggesting the result was not a local anomaly. Regulation, not economics, blocked early commercialization of index products at Wells Fargo. ETFs are not economically revolutionary; they are a structural combination of open-end and closed-end fund features. Claims that passive investing has “taken over” are overstated because many funds are closet indexers and the market is already highly mixed. Data-driven science should replace subjective investing and policy judgments whenever possible.
Data Points: Index fund anniversary: 50th anniversary - The episode is built around the 50th anniversary of the index fund and its historical origins. Original Wells Fargo compensation: $6,000/year - McQuown recalls his New York salary before being recruited by Ransom Cook. Recruitment offer: $18,000/year - Cook offered McQuown a job in San Francisco, prompting the move to Wells Fargo. Later salary: $40,000/year - McQuown says his pay rose substantially after his work proved influential. Pension fund size: about a half a billion dollars - A Wells Fargo trust client’s pension fund was invested in only 25 names, illustrating underdiversification. Academic consultants: 12 - McQuown says the research team worked with 12 academic consultants. Future Nobel laureates: 6 of 12 - He notes that six of those consultants later won Nobel Prizes. All-New York fund size: about 600 names - The first fund was an all-New York portfolio rather than an S&P 500 fund. Investment management fee: 100 basis points vs. 25 basis points - McQuown says the proposed S&P 500 product would have been priced at roughly a quarter of active management fees. Current low-fee comparison: 25 down to 5 basis points - He contrasts early fees with modern index-fund pricing. Historical stock-trading span: 366 years - McQuown says there were 366 years between the first stock trade in 1602 and a risk-adjusted performance algorithm in 1968. First stock trade: 1602 - He cites the East India Company on the Amsterdam Exchange as the first stock trade. Risk-adjusted performance algorithm: 1968 - He notes that formal performance measurement arrived very late relative to stock-market history. Time-sharing computer model: IBM 360/67 - McQuown describes the first commercial-scale time-sharing computer used at Wells Fargo. Time-sharing adoption: 1966-1967 - He says Wells Fargo got access to the IBM 360/67 around this period. Regulatory milestone: June 1971 - He cites the Supreme Court decision in Investment Company Institute v. Comptroller of the Currency as blocking commercialization. Passive assets figure: $11 trillion - The hosts cite the size of publicly admitted passive/index assets; McQuown says this understates the real amount.
Pivotal Quotes: "The real birth of the fund was four or five years before that." — Eric Balchunas: He explains why the episode focuses on McQuown rather than the usual Vanguard-centered origin story. "The more names you had in the portfolio, the better." — Mac McQuown: McQuown summarizes the core finding from the early diversification and market-portfolio research. "If you don't think I wasn't conscious of the fact that we had uncovered something serious, I was." — Mac McQuown: He reflects on recognizing the significance of the research while it was happening.
Implications: The episode reframes indexing as a data-and-computing revolution born from academic collaboration and regulation, not a single founder. It suggests passive investing is broader, older, and less threatening to markets than critics दावा.
About Trillions
Money goes where it's treated best. That simple truth is a big reason why more and more money—trillions, in fact—flows into a powerful, low-cost tool that's quietly transformed investing in recent years. Exchange-traded funds, or ETFs, let you invest in everything from the stock market to gold like never before. This biweekly podcast will demystify them—and delight you in the process.