enhanced index funds


A

anoop

Does anyone have thoughts on enhanced index funds?
http://preview.tinyurl.com/yrn2b2

My knee-jerk reaction is to dismiss them on the basis that:
- That they probably have a slightly higher risk than the index
they are trying to track and could potentially have lower returns.
- They have a higher expense ratio than the corresponding
index fund.

I looked at FLCEX (large cap core enhanced index) on
Fidelity's website and found that it has an expense ratio
of 0.46% while the corresponding S&P500 index fund
has an expense ratio of 0.1%. However, FLCEX has
outperformed the index slightly during the 1 month that
it has results reported for.

Given that the only mutual funds that I currently invest
in are index funds, is there any reason for me to be
watching these?

Anoop
 
Ad

Advertisements

M

Mark Freeland

anoop said:
Does anyone have thoughts on enhanced index funds?
http://preview.tinyurl.com/yrn2b2

My knee-jerk reaction is to dismiss them on the basis that:
- That they probably have a slightly higher risk than the index
they are trying to track and could potentially have lower returns.
- They have a higher expense ratio than the corresponding
index fund.
Major drawback - high (or at least higher) turnover. This is in comparison
with cap (well, free-float)-weighted index fund. By definition, the
conventional index fund measures/represents the average performance of a
dollar in the market (i.e. the index represents 1/Nth of the market,
pro-rata). Anything else is an attempt to beat the performance of the
average dollar.

IMHO, this includes fundamental indexes, which seem to me to a simple form
of enhanced indexing. Enhancement can include picking "better" companies in
the same sector (e.g. Pepsi instead of Coke) or by overweighting stocks or
sectors.

The enhancement can be static (fundamental indexes never change their
formula for selecting/weighting stocks), or dynamic - continually changing
the heuristics as the market gradually evolves over time.
I looked at FLCEX (large cap core enhanced index) on
Fidelity's website and found that it has an expense ratio
of 0.46% while the corresponding S&P500 index fund
has an expense ratio of 0.1%. However, FLCEX has
outperformed the index slightly during the 1 month that
it has results reported for.
The concern I have with Fidelity specifically is that they've been there,
done that. Fidelity Disciplined Equity was created by Brad Lewis as an
enhanced index fund (though it wasn't called that), which used the first
form of enhancement I gave (stock substitution). Stock Selector, also
created by Lewis, was more wide ranging, using both substitution and
weighting variations. The funds did well for awhile, but then fizzled, and
Lewis left.

On the other hand, Montgomery over at Bridgeway has been doing a great job
with quants for years.

Mark Freeland
(e-mail address removed)
 
D

Douglas Johnson

anoop said:
Does anyone have thoughts on enhanced index funds?
http://preview.tinyurl.com/yrn2b2

My knee-jerk reaction is to dismiss them on the basis that:
- That they probably have a slightly higher risk than the index
they are trying to track and could potentially have lower returns.
- They have a higher expense ratio than the corresponding
index fund.
One fund I've been tracking (not owning) since it's inception 18 months ago is
PRF, which is a fundamentally weighted index for the S&P 500. It does have a
higher expense ratio of 0.79%. It is based on a model that has been back tested
to produce a 2% additional return over the S&P 500.

I like the theory behind fundamental weighting a lot. The actual practice has
been, well, interesting. Last year, PRF gained 3.6% more than the S&P 500. This
year, only 0.9% over the S&P 500. Although, if you think about it, that will
put it on track to a S&P 500 + 2% gain for the year.

As for turnover, it is only rebalanced once a year.

-- Doug
 
L

learnfpga

Does anyone have thoughts on enhanced index funds?http://preview.tinyurl.com/yrn2b2

My knee-jerk reaction is to dismiss them on the basis that:
- That they probably have a slightly higher risk than the index
they are trying to track and could potentially have lower returns.
- They have a higher expense ratio than the corresponding
index fund.

I looked at FLCEX (large cap core enhanced index) on
Fidelity's website and found that it has an expense ratio
of 0.46% while the corresponding S&P500 index fund
has an expense ratio of 0.1%. However, FLCEX has
outperformed the index slightly during the 1 month that
it has results reported for.

Given that the only mutual funds that I currently invest
in are index funds, is there any reason for me to be
watching these?

Anoop
I been looking at some of the funds offered by Dimensional Funds (DFA)
and wisdom tree. I am probably going to buy some of those just to have
those in my portfolio. Right now everything I have is in low cost
traditional index funds offered by vangaurd. But I dont see why one
shouldnt have 15-20% of there portfolio in so called enhanced index
funds. My 2 cents....
 
R

Rich Carreiro

learnfpga@gmail.com said:
I been looking at some of the funds offered by Dimensional Funds (DFA)
You have to sign up with a DFA-approved registered
investment advisor and have the funds under his umbrella
to be able to buy into DFA.
 
H

HW \Skip\ Weldon

You have to sign up with a DFA-approved registered
investment advisor and have the funds under his umbrella
to be able to buy into DFA.
In looking at the DFA expense ratios, it's doubtful that the cost of
the DFA-approved advisor is included. Rather, I would expect that the
advisor's fees/commissions are piggy backed on top of the expense
ratios.

Two questions:

1. What is a representative cost of having the advisor, and how does
the investor pay it?
2. Are there any charts that show the impact of those costs on
long-term returns?


-HW "Skip" Weldon
Columbia, SC
 
Ad

Advertisements

R

rick++

1. What is a representative cost of having the advisor, and how does
the investor pay it?
An index modification could be completely formulatistic such as the
class "Dogs of the Dow".
 
E

Elizabeth Richardson

rick++ said:
An index modification could be completely formulatistic such as the
class "Dogs of the Dow".
But how is the advisor paid?

Elizabeth Richardson
 
J

joeu2004

1. What is a representative cost of having the advisor, and how does
the investor pay it?
Runs the gamut of the services of a financial planner: fee-based and/
or commission-based; flat fee, by the hour, or a percentage of assets.
 
T

Tad Borek

HW said:
1. What is a representative cost of having the advisor, and how does
the investor pay it?
2. Are there any charts that show the impact of those costs on
long-term returns?

Skip as I think you know I use these funds in my practice and I've seen
fee schedules from some other advisors that use them. There's a range
and it almost always varies by account size. I'd say a typical advisor
fee would be 1.0%-1.2% annually as a starting point, with some as high
as 1.5%. And dropping as low as <0.50% annually for larger accounts.
Brackets and the definition of "larger accounts" are entirely up to the
advisor, and the fee varies by the level of services. For example you
might offer soup-to-nuts planning as part of this, deal with investing
new cash & rebalancing, prepare tax returns, etc etc. Just taking a
check, buying the fund, and forgetting it would be unusual.

So your #2 is hard to answer. The quick answer is just doing a
comparison of what losing say 1% to costs does to returns. But that's
"all else equal" which may not be the case...if you want whatever
services come along with the advisor fee, it wouldn't be such a
straightforward comparison. From just an investment perspective,
comparing the returns of a DFA fund in an asset class to an ETF or
Vanguard alternative would give a sense of whether it's "worth it" -- if
all you want is access to a specific mutual fund. In some asset classes
they offer a truly unique fund, but in many there are comparable
alternatives from other passive managers.

-Tad
 
M

Michael Siemon

Tad Borek said:
...

So your #2 is hard to answer. The quick answer is just doing a
comparison of what losing say 1% to costs does to returns. But that's
"all else equal" which may not be the case...if you want whatever
services come along with the advisor fee, it wouldn't be such a
straightforward comparison. From just an investment perspective,
comparing the returns of a DFA fund in an asset class to an ETF or
Vanguard alternative would give a sense of whether it's "worth it"
Merriman (http://www.merrimancapital.com), which is one of the
advisory firms that offers DFA funds, charges 1% (up to $500K in
assets, with decreasing charges thereafter). They generally report
the results (via http://www.fundadvice.com/modelsexplained.html)
in comparison to Vanguard portfolios of closely-similar allocations,
with their 1% fee deducted on the DFA side-- and generally, the
DFA-based portfolios have one-to-two percent better annual yields than
the Vanguard near-equivalent even after this deduction.

They do provide some additional services (rebalancing, etc, as you
suggest) in addition to just being a gateway for DFA.
 
Ad

Advertisements

A

anoop

Thanks for all the responses. I think I'll just
stick with plain old index funds for now.

Anoop
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads

Index funds 10
Fund & Index Updates 1
index fund on nasdaq 4
Is there a super index fund? 4
Index Bear Funds 0
Canadian Index Funds 2
Bond index funds 9
Index Fund Ques 14

Top