The incredible rise of the $4 trillion equity index fund business in 1 chart

http://www.businessinsider.com/index-fund-assets-under-management-2016-1?utm_source=markets&utm_medium=ingestStop me if you've heard this before: investing in broad, low-cost index funds is the best way to save for retirement.
In the wake of the tech bubble — which saw a lot of average-people-turned-stock-traders lose everything — and the housing bubble — which saw average-people-turned-real-estate-professionals lose everything — a vocal part of the financial services community has espoused the virtues of index funds like those offered by Vanguard as the best, most responsible way to save for retirement.
Vanguard's S&P 500 fund, for example, charges investors just 0.05% per year — or $50 for $10,000 invested — to track the returns of the benchmark US stock index. And if you're, say, a 30-year-old professional looking to save for retirement and you want to buy some stocks, buying the S&P 500 for what amounts of a minimal management fee is your best bet.
Of course, you have to actually stick it out through tough times (like 2015, though many readers will be quick to remember far more challenging years — like 2008 — that saw the S&P 500 fall in excess of 30%) and continue to add to your holdings over time. And as we've written before, it is about time in the market not timing the market that builds long-term wealth.
So in the wake of this new push towards low-cost financial products, the amount of money that has piled into index funds is truly incredible, rising from around $11 million 1975 to $4 trillion today.
CFA Institute
This is, on the one hand, an incredible innovation benefiting investors of all stripes. Investing cheaply in a broad index of stocks is a huge benefit to disciplined long-term investors.
On the other hand, and in the eyes of Vanguard founder Jack Bogle, these funds have led to the rise of merely the latest speculative hot potato being passed around Wall Street.
Vanguard, you'll recall, is the world's largest mutual fund company and Bogle saw the S&P 500 fund in the same spirit as most all of the company's products: something that would be held "forever" and used by prudent investors saving for retirement.
This was all good and well for a while. And then it wasn't.
In the CFA Institute's Financial Analysts Journal this month, Bogle writes:

"The fundamental principles established by that first index fund are simple: Buy virtually the entire US stock market and hold it intact 'forever,' eliminate advisory fees, and minimize both operating costs and portfolio turnover. These simple principles have won the day. But in 1993, almost two decades after the creation of the original index fund, a new form of index fund—originally designed for stock traders and speculators—came into existence. That change and that challenge, little noted in financial history, will be long remembered."

This new form of fund, called an exchange-traded fund (or ETF), is treated like a stock on daily exchanges but these instruments have morphed from being simple index-trackers to more complex or arcane bets.
The "HYG" ETF, for example, tracks a basket of high-yield bonds. The "EWJ" ETF tracks Japanese stocks. Simple enough.
The "JNUG" ETF, meanwhile, tracks the performance of small gold mining companies ... except it is also levered 3-times. This means that "JNUG" seeks to give investors triple the performance of small mining companies on a given day.
Bogle's view — which he's made public before — is that these ETFs are merely vehicles that allow speculators to take more and more risk. And as Bogle notes, the triple-levered ETFs allow investors to make bets which of course are extra-great when you're right and extra-bad when you're wrong.
The turnover in these funds, as Bogle writes, is truly extraordinary, writing (emphasis ours):

Through September 2015, shares of the 100 largest ETFs, valued at $1.5 trillion, were turning over at an annualized volume of $14 trillion, a turnover rate of 864%.

By way of comparison, the annualized turnover volume of the 100 largest stocks, valued at $12 trillion, is running at $15 trillion for the same period, a turnover rate of 117%. Trading in the 100 largest ETFs thus represents about 89% of such stock trading, up from a mere 7% 15 years ago. Given these powerful data, it is hardly unfair to describe today’s ETFs—as a group—as the modern way to speculate in the stock market.

But like the idea that high-frequency traders increase markets liquidity, proponents of ETFs will argue that the propagation of these funds ultimately drives down overall costs for most investors.
In short, this school would tell you the 0.05% fee on the Vanguard S&P 500 fund wouldn't be 0.05% without those speculators Bogle so dislikes because the sheer volume of trades being done in these funds allows the management fees to be so low since fees are earned in other ways.
Bogle's article, however, ultimately concedes that indexing is winning in a big way, is likely to continue to do so, and yes of course things aren't perfect.
For while only a handful of those invested in ETFs might be using what Bogle might see as the preferred application of the funds — i.e. saving for retirement cheaply over the long-term — ultimately these are the funds that give investors the thing they really want: beta.