Critics called it "Bogle's folly." In 1976, John Bogle introduced the first index fund through his new company, the Vanguard Group. The idea was based on research for his senior thesis in economics at Princeton, in which he showed that, on average, professional money managers failed to beat the rate of return of the overall market. (The thesis, written in 1950, earned him an A+.)

Wall Street veterans initially scoffed at the fund, which tracked the Standard & Poor's 500 Index. Who would be content with...