Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.

For millions of people around the world, investing in stocks no longer involves picking individual

companies or hiring a portfolio manager to pick them for you. It means investing in an index fund.

With index funds, there's no portfolio manager buying the good stocks and selling the bad ones.

Index funds are passively managed, meaning that they buy and sell stocks only when those stocks are

added or removed from the index they track, like the S&P 500.

Passive investors get the return of the overall stock market by investing this way rather than

trying to beat the market and risk underperforming it. This isn't what these indexes were originally

designed for though. The first stock market index, the Dow Jones

Transportation Index, was formulated 137 years ago by the editor of the Wall Street Journal,

and it was used solely for informational purposes as an economic indicator to be published in

the newspaper. But those days are long gone. Today, around

$11 trillion is invested in index funds up from around $2 trillion a decade ago. And since

2019, more money is invested in passive index funds than in actively managed funds in the

United States.

Thus, for many companies, their largest shareholders are index funds.

These indices are not static though.

Their component stocks are constantly changing, and this has to happen as from time to time

member companies might merge with each other,

go private or shrink in size, leaving a gap in the index.

Other small companies grow and can be added to replace the stocks that leave.

General Electric, for example, had the longest presence of any company in the Dow Jones Industrial Average, having been added at the start of the index in 1896, only to be removed 122 years later in 2018, replaced by Walgreens.

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