Editor's Note
By Journal of Indexes Staff

After an avalanche of mergers and intrigue (well, by index standards anyway), things settled down a bit heading into the lazy days of summer. Even the iShares' march through ETF and index market share temporarily set up umbrellas on the beach. BGI and Morningstar delayed the launch of the new Morningstar ETFs from June 11 to July?? (fact check), the earliest date a Big Board bell ringing could be rescheduled after the original was cancelled when the NYSE to commemorate the day of mourning for President Reagan.

Other than that, it's mostly been the (ho hum) continuing story of index investing dominance. Vanguard has solidified the Vanguard 500's position as the world's largest mutual fund, even as two index pioneers are now positioned as the world's two largest investment managers. According to the latest Pensions and Investments survey, SSgA and BGI have moved firmly into first and second place in terms of total assets, with SSgA now sitting on $1.1 trillion (yes, Virginia, that's trillion with a "t") in assets, compared to hot-on-the-heels BGI's $960 billion.

Which is really not much of a surprise, as the big money tends to go where the money is made. They may not make a lot of margin, though SSgA's quarterly fees of about $150 million on the $1.24 trillion (according, to the most recent numbers from SSgA) in assets is not looking bad after a margin-boosting shift toward some active (actually mostly enhanced index) investing. Still, if my math serves me right, this only amounts to 5.45 basis points per year (or .0545%) in average management fees on all that money, which does seem fairly reasonable, put points to some of the higher fee money, as large accounts of directly managed index money is often run at a couple bps.

Whatever these "assets under management" numbers represent, both SSgA and BGI alone each has more cash and equity under management than the GDPs all of sub-Saharan Africa. South Africa and Nigeria have GDPs of $456 billion and $111 billion respectively, and the numbers go sharply downward from there, falling mostly between a range of Benin's $7.7 billion to Zimbabwe's $24 billion). Indulge me. This is the sort of analysis that is born of the long transition from being a Peace Corps volunteer to a Wall Street pundit.

While we're doing some numbers comparisons, how about a look at indexing overall? I came across some interesting numbers recently. The cold facts of indexing logic have long held sway in institutional circles, but they are now making inroads in the realms of average investors … and fast.

As Jack Bogle says (and really no one can say it better):

"The evidence on the triumph of indexing is overwhelming. In the mutual fund industry, total assets of equity index funds, barely $1 billion in 1990, now total over $550 billion, one-sixth of all equity fund assets."

And here's the growth chart which, rather stunningly (and not coincidentally, as ETF assets have grown from 1.7% of all index assets in the U.S. to 26% at the end of 2003), has moved on the same sort of exponential trajectory as that of ETFs. These numbers are even more dramatic when you look at the growth of indexing and ETF investing globally, where many international investors who once had the ability to choose between either rip-off or, well, rip-off, can now choose between rip-off or smart investment.

Still overall, the recent trends have not been all positive. I mentioned a move toward higher margin (albeit lower performing) active investing in the index world, but as market returns and fund inflows have gone down, fees in general have gone up. Once-exiled funds, so loaded that they'd surely get pulled over for DWI if the highway patrol was cruising the neighborhood, have made a strong comeback. The dogs of the SEC have been turned loose on high-fee index funds, but it's like going after the fire ant in a pit of venomous snakes.

But more on that next column, as I promised to keep this to a reasonable length. Let's get to the fun stuff now: pension fund indexing, currency indexes, equal-weighted and sector ETF investing, and the usual quality commentary from John Bogle, Gary Gastineau and the Curmudgeon. So sink that umbrella into the sand, put on your shades & kick back and enjoy some quality index reading.

Jim Wiandt
Editor
Journal of Indexes