From crypto bros to legacy investors, blockchain-powered tools are bringing the world of DeFi (decentralised finance) to more people than ever before. Phuture is just one part of a rapidly-evolving ecosystem, applying a well-established instrument - index funds - to a rapidly transforming DeFi world.

In fact, to some DeFi users, the concept of indices themselves can be a bit murky. What is a market index, and what is an index fund? Most importantly, how do those ideas relate to DeFi?

Stock markets - the shortest history

The first stock market began in Amsterdam. Stocks were somewhat limited; you could purchase exactly one publicly traded stock - the Dutch East India Company. Fast forward a bit, and stock markets have begun to catch on. The Philadelphia Stock Exchange (1790) got things kicked off in the US; the London Stock Exchange followed in 1801.

Over the course of the 19th century, stock markets large and small began to expand their offerings. Mutual funds, in which a group of investors shared monies to purchase a variety of stocks, originated (again) in Holland in 1774. As the decades passed, the mutual fund idea spread throughout Europe and the UK, but it didn’t reach American investors until 1893, when the Boston Stock Exchange saw the premier of the Boston Personal Property Trust.

Mutual funds appealed to investors as a way to diversify, distributing risk by investing in one fund with multiple holdings. But that approach required investors to have a broader knowledge of the market, and with stock exchanges growing rapidly, investors needed a means of following market performance in general.

A market measuring tool

Enter the Dow Jones Industrial Average. Begun in 1896, the Dow Jones was and remains today one of the most important stock market indexes. Today, thousands of stocks form part of the index, but it began in the late 19th century with merely 12. The goal was the same then as now; to give investors a tool to track performance of the market as a whole, rather than simply the performance of an individual stock.

Market indexes (or indices) caught on quickly. Combined with mutual funds, they gave investors a way to track their own performance against a market average. But mutual funds themselves posed a problem; by 1960, there were hundreds of mutual funds trading in North America, and investors were spoiled for choice. A good problem to have, for sure, but not as helpful when the original idea was to make things simpler, not equally complicated. If guessing which mutual fund was best turned out to be just as painful as choosing the right individual stocks, why waste time with the mutual fund in the first place?

There was room for another idea, and three men came up with it.

Index funds - tracking the average

In a 1960 entry in the Financial Analysts Journal, Edward Renshaw and Paul Feldstein proposed an “unmanaged investment company” - an investment tool set to follow “a representative average.” 

In other words, why try to beat the market? Just match it, and reduce the headache all around.

The paper prompted strong rebuttals, particularly from John Bogle. A noted financial analyst and investor, Bogle found the idea ridiculous; an actively managed mutual fund should always outperform a passive vehicle that simply tried to keep pace with market averages.

Unfortunately for Bogle’s accepted wisdom, Wells Fargo was conducting research at the time which pointed strongly in the other direction. Debates raged internally, with analysts inside the company expressing shock that to outperform the average analyst, all an investor needed to do was “buy the S&P 500”!

By the early 70s, institutional index funds were up and running. There were three early efforts; the Wells Fargo fund that simply tracked the S&P 500, followed by two other index funds set up by institutional investors. Batterymarch Financial Management and American National Bank. Notably, Batterymarch’s fund - the Batterymarch Market Portfolio - didn’t even attract any investors.

News coverage was understandably negative. The Wells Fargo team was a crack bunch of financial analysts led by John McQuown, and the index fund idea seemed intriguing, but it ran counter to conventional wisdom. Aiming for an average just didn’t seem to bode well for long-term success.

From institutional investors to the public

But by the middle of the decade, the tide had begun to turn. AT&T moved $120 million into the three index funds after discovering that only one in five of its financial managers were beating the index. And by then, John Bogle had jumped back into the debate - but on the other side. His own research backed up the new idea; actively-managed funds consistently under-performed index funds.

Armed with that knowledge, Bogle aimed to get into the game himself. After selling his idea to Wellington, Bogle pushed ahead with plans to open a new index fund. And on August 31, 1976, Bogle officially launched the first public index fund, open to private investors - Vanguard.

The Vanguard 500 opened the floodgates to public index funds. There are hundreds of offerings now, each with a particular basket of funds aimed to match the average performance of the market or a particular sector.

Crypto, DeFi, and the Phuture of index funds

That’s the history of the index fund - but how does crypto fit in, and what does Phuture have to do with it?

Index funds proved to be a low-cost, accessible way for investors to generate consistent returns. There’s also a tremendous amount of variety possible in the index fund world; by varying the contents of the index fund, investors can target each fund at a slightly different sector of the market.

What Wells Fargo did for institutional investors and Vanguard did for individuals, Phuture seeks to do for crypto investors. Phuture is a crypto index platform, providing index funds that track different sectors of the emerging crypto economy, and capture yield from underlying protocols.

The story of financial index funds started long before Phuture. But Phuture will play a crucial role in shaping index fund investing for the crypto economy, forming an exciting next chapter in a story that’s full of potential.

Learn more about Phuture index funds here.