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Morningstar
5 index funds to dump
Dont buy the myth that all index funds are low-cost. Heres a list of funds plagued by high turnover, high costs, and a narrow focus.
By Russel Kinnel, Morningstar
The debate over index funds versus actively managed funds is often described as a choice between low costs and high costs, but thats oversimplifying things. Sure, the cheapest funds are index funds, but there are also low-cost active funds and high-cost index funds. If you own a high-cost index fund, dump it. The point of index funds, after all, is low costs.
High turnover is a rough measure of another type of cost. Trading costs add to a fund's overall expenses, sometimes substantially. So be sure to chuck any stock index funds with high turnover.
Finally, avoid a narrowly focused, volatile index fund. Concentration and volatility by themselves arent an impediment to attractive long-term returns for a fund. However, they decrease the likelihood investors will hold the fund long enough to enjoy those attractive returns. The average Joe has cleaned up with index funds because many of the largest invest across a wide swath of the market. This limits the sort of wild swings that can cause investors to bail out during the lows, thus missing out on a funds strong long-term returns.
So, with that in mind, Ill mention a few of the less-agreeable index funds that you ought to bail on.
5 funds to avoid
Amidex35 Israel
How pointless is an index fund that charges 3.53%? The SEC recently suspended trading in a number of stocks of companies that missed filing deadlines. I wish theyd clean out some of these super-high-cost funds that have expense ratios so high that failure is quite likely over the long haul. Many of Amidex35 Israel's (AMDEX) larger companies, including Teva Pharmaceutical Industries (TEVA, news, msgs), trade in the United States, so you could simply buy a few of them through a discount brokerage for a smaller price.
ProFunds U.S. Government Plus
ProFunds U.S. Government Plus (GVPSX) is a close runner-up in the absurd-expense-ratio challenge. It charges 2.57% for the privilege of leveraging U.S. bonds. And how has it performed? Since its inception 25 months ago, the fund has returned an annualized 3.26% compared with 6.97% for the average long-term government fund. Maybe "plus" means "indefensible" in another language.
ProFunds UltraOTC
Though ProFunds UltraOTC (UOPSX) could have made the list for its high costs alone, its actually the volatility that makes it worth noting. The fund has an amazing standard deviation of 62%. Only a handful of funds have higher standard deviations. This is the sort of fund that very few investors have the patience or pain threshold to use profitably.
Strong Dow 30 Value
Technically speaking, Strong Dow 30 Value (SDOWX) is an enhanced index fund -- not a pure index fund. The clever idea behind it is to put half the fund into the Dow Jones Industrials Index while management invests the other half in the Dow 30 stocks but gets to choose the weightings. Thus, if management is clever, it can outperform the index. Unfortunately, the fund has lost to the Dow in every single calendar year since its launch date at the beginning of 1998. Its total return of 31.33% through May 2004 lags the Dows 45.16% return. It charges 1.40%, but you can get a pure Dow index fund without all that "value added" for 0.18% if you buy a Diamond Trust (DIA, news, msgs) exchange-traded fund.
Morgan Stanley Value-Added Market Equity
Morgan Stanley Value-Added Market Equity (VADAX) is a fairly similar story. Its big idea is to give equal weighting to all of the S&P 500 components rather than using the market-cap weighting in the S&P 500, which leads to an index dominated by giants like General Electric (GE, news, msgs) and Microsoft (MSFT, news, msgs). However, is it worth paying a 5.25% load and a 0.89% expense ratio when you can buy the Rydex S&P Equal Weight (RSP, news, msgs) exchange-traded fund for a lower commission and a 0.40% expense ratio?
Copyright 2004. Morningstar, Inc. All rights reserved.
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