A Brief History of Mutual Funds

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Mutual Fund Education

A Brief History of Mutual Funds

Aaron Levitt Sep 02, 2014

Despite being the number one way that many invest for the future, most people know little about the basic history behind mutual funds. Perhaps not as exciting as the birth of exchange traded funds (ETFs), mutual funds' history is exciting in its own right. Spanning several centuries and nations, the basic concepts behind mutual funds are as old as modern trade itself. The idea of pooling capital for investment purposes has been around for a very long time.

Be sure to also see 7 Questions to Ask When Buying a Mutual Fund


18th Century: “Unity Creates Strength”


Ketwich followed up the negotiatie with several others, including one that lasted for more than 114 years before being dissolved. Various other merchants and traders in the Netherlands began offering similar vehicles to regular folk. In fact, during the 1780s, there were more than 30 negotiaties that owned United States credit issues alone.


19th Century: Spreading Across Europe


From here, the investment trust structure flowed towards and into America. Formed in 1893, The Boston Personal Property Trust became America’s first closed-end fund. Shortly after several others would launch, including the important Alexander Fund. This fund was critical in shaping the modern history of mutual funds as it allowed investors to make withdrawals on demand. That feature has many historians calling the Alexander fund the very first mutual fund.


20th Century: The Start Of “Real” Mutual Funds


The late ’20s saw a flurry of mutual fund activity including some notable firsts. State Street launched its first fund, while Scudder, Stevens and Clark would launch the first no-load fund in 1928. Perhaps the biggest advancement would come from the creation of the Wellington Fund. Wellington—which is now part of Vanguard—was the first mutual fund to own stocks and bonds in one ticker. By the end of 1929, there were 19 open-ended mutual funds and roughly 700 closed-end funds in the U.S.

But all good things must come to an end. The stock market crash of 1929 and resulting Great Depression put the kibosh on the mutual fund industry. That is until the creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act of 1933, and the enactment of the Securities Exchange Act of 1934. These events saw several important safeguards designed to protect investors put in place, including quarterly filings with the SEC as well as requiring that a prospectus be made available for investors.


Modern Times: Index Funds, IRAs & ETFs


One of the biggest contributions was the creation of the index fund – a mutual fund that would hold all the stocks of a particular market measure. William Fouse and John McQuown of Wells Fargo established the first index fund in 1971. However, it was Vanguard’s John Bogle who made it memorable back in 1974 by offering it to retail investors. The First Index Investment Trust—based on the S&P 500 Index—allowed Mom & Pop investors to own the entire market. The first money market fund—The Reserve Fund—debuted in 1971, while 1976 saw the first municipal bond launch. The 1990s saw the rise of the superstar fund manager, as people like Bill Miller and Peter Lynch became driving forces at the funds they managed.

Powering the expansion of mutual funds during this time had been the creation of various retirement and tax vehicles such as the IRA and 401(K) accounts. These accounts helped to replace traditional pensions at many companies. As such, money from investors of all sizes and walks of life poured directly into mutual funds.

Today, the evolution of mutual funds continues with the creation of the exchange traded fund (ETF). In 1993, Nathan Most developed a way for investors to trade index funds throughout the day. He dubbed his fund the Standard & Poor’s Depository Receipts (SPDRs -pronounced spiders) and based it off the S&P 500 Index. The SPDR S&P 500 (SPY) kicked off the ETF revolution and is still one of the most successful funds.


The Bottom Line



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