If Indexes Are Proliferating, Can Index Funds Be Far Behind?

April 01, 1999

Recent months have seen the launches of a plethora of new funds, as well as the announcements of an equally large number of impending launches.

At least two new S&P 500 index funds were filed with the SEC. Kemper Variable Series is planning to issue a no-load Kemper Index 500 Portfolio that will track the performance of the S&P 500. The portfolio will invest at least 80% of its assets in the stocks of companies included in the index, excluding Bankers Trust Corp. The portfolio's investments will be managed by ScudderKemperInvestments Inc.

John Hancock Advisers, a subsidiary of John Hancock Mutual Life Insurance Co., filed with the SEC to launch the John Hancock 500 Index Fund, which will invest 80% of its assets in the stocks contained in the S&P500 Index. The fund will be available only to clients of John Hancock's 401K plan and will be managed by Roger C. Hamilton, a vice president at John Hancock Advisers. The fund will offer four classes of shares, one for institutional investors and the rest with level, front-end and back-end loads.

Investors looking to invest in Israel's burgeoning economy were provided with another vehicle. TransNations Investments LLC launched an index fund based on the AMIDEX35, an index consisting of 35 Israeli companies chosen by market capitalization that trade on both Israeli and U.S. exchanges. The no-load fund is one of only a few index-based investments available for those looking to invest in Israel. The underlying index, the AMIDEX35, was created and is maintained by TransNations Investments. Its inception was January 1, 1999. The fund was launched on June 22

Charles Schwab Investment Management Inc., the investment management affiliate of Charles Schwab & Co., also launched a new fund. The Schwab Total Stock Market Index Fund, which seeks to track the performance of the Wilshire 5000 index, became available April 19. Rather than owning all those stocks, the portfolio managers will utilize a sampling strategy and include a representative cross-section of the stocks in the index to save on transaction costs. A Schwab press release noted that while most index funds are fairly tax efficient, this characteristic is intensified in the total market fund. "Because it essentially represents all stocks in the U.S. market, the fund won't have to routinely sell stocks that leave the index due to changes in their market capitalization, helping minimize capital gain distributions to shareholders," the release said.

The Fidelity Four-in-One Index Fund presents an interesting twist on traditional index funds. Launched on July 7, the fund is actually composed of four smaller funds put out by Fidelity Investments: the Spartan International Index Fund, the Fidelity U.S. Bond Index Fund, the Spartan Extended Market Index Fund and the Spartan Market Index Fund. The individual funds track the Morgan Stanley Capital International Europe, Australia, Far East Index; the Lehman Brothers Aggregate Bond Index; the Wilshire 4500 Equity Index, and the Standard & Poor's 500 Index, respectively. "The fund is designed to help investors achieve diversification," said Vincent Loporchio, a spokesperson for Fidelity Investments. There are very few products available that offer a combination of indexing strategies in one fund, as this one does, Loporchio said.

Through the 12 months ended June 30, 1999, the fund theoretically would have shown a return of 16.4%.

E*Trade's asset management subsidiary is continuing to build its family of index funds. In recent months it has announced its intentions to create no less than four different index funds in filings with the SEC. E*Trade president, Brian Murray, has explained the company's plans to offer an extensive family of funds as "diversifying our revenue stream." The new funds would join the E*Trade S&P 500 Index Fund, which is currently E*Trade's only home-grown fund.

On May 17, E*Trade filed for the E*Trade Extended Market Index Fund and the E*Trade Total Bond Index Fund. The first will track the performance of the Wilshire 4500 Index, which contains the stocks of the Wilshire 5000 minus the stocks of the S&P 500. The second fund will track the Lehman Brothers/Corporate Bond Index, which consists of about 5,000 fixed-income securities. On May 24, the company filed for the E*Trade Technology Index Fund, which will track the performance of the Goldman Sachs Technology Index. On July 26, E*Trade filed to create an index fund that would track the Goldman Sachs E-Commerce Composite Index.

Barclays Global Investors is also delving into relatively new territory with the introduction of the Bond Index Plus Fund on May 17. The fund is an enhanced index fund that seeks to outperform the Lehman Aggregate Bond Index. It is the first in a series of enhanced bond index funds that BGI hopes to offer.

The fund is currently only available to institutional investors. BGI says it created the fund specifically for institutional investors who wanted better-than-index returns in a controlled and limited risk portfolio. The fund's strategy separates the components in the bond index into groups according to shared characteristics such as credit rating and maturity. The portfolio consists of what the fund managers deem to be a representative selection of the securities in the index, based on these groupings. But instead of seeking enhanced returns by overweighting or underweighting certain groups, the index managers will instead try to outperform the index by making strategic use of trading opportunities. Rather than putting on large positions outside the index, BGI takes a number of "very small bets" within what is otherwise a broadly spread portfolio that retains the general index structure.

Deborah Larson, a Public Relations Specialist for BGI, explained that as bond indexes become broader based and more representative of the market as a whole, it becomes more difficult for active fund managers to outperform them. This, she said, results in an apparent and growing need for investment vehicles like enhanced bond index funds. S


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