index fund: how to select

Hi,
I am considering select some index fund for my roth ira but have some
basic questions.

First it is surprise to me that there is no easy place on the web to
rank the index funds. I go to morningstar.com, in its fund screener, I
do not see index fund as a fund group type. Same thing in
finance.yahoo.com.

Second, why do same kind index funds perform differently? If I
understand correctly, let us say there are 2 Sp500 index funds, then we
theie managers do are same job, buy the stocks listed in SP500 and
according to the size of each stock buy the corresponding ratio. Then
they should all perform same as SP500. But they do not?

THanks a lot!

Re: index fund: how to select

wrote:
>
> Hi,
> I am considering select some index fund for my roth ira but have some
> basic questions.
>
> First it is surprise to me that there is no easy place on the web to
> rank the index funds. I go to morningstar.com, in its fund screener, I
> do not see index fund as a fund group type. Same thing in
> finance.yahoo.com.


(June 27, 2005)

"We can use the Morningstar Premium Fund Screener ...
'Index Funds = Yes'
It's pretty easy to find all the index funds in Morningstar's database;
you simply use this line as your criterion. Finding the line can be a
little counterintuitive for some, though: It is within the Special Fund
Types section, which is under the General head in the Premium Fund
Screener. There happen to be 482 index funds in the database."

Though this is an "easy place on the web to rank the index funds",
Morningstar's Premium Fund Screener is not free.

Lipper (for free) has its own category for S&P 500 funds, or you can
simply use the checkboxes in criterion #3 in their fund screener to
restrict your search to index funds:


> Second, why do same kind index funds perform differently? If I
> understand correctly, let us say there are 2 Sp500 index funds, then we
> theie managers do are same job, buy the stocks listed in SP500 and
> according to the size of each stock buy the corresponding ratio. Then
> they should all perform same as SP500. But they do not?

Some index funds hew rigidly to their index - when a stock is added,
they must buy it that day; they must sell a stock the day it is removed
from the index. Other index funds have more flexibility - they can
adjust their holdings at more opportune moments (e.g. after the initial
price surge due to a stock being added to the index subsides).

Most S&P 500 index funds fully replicate the index; that is, they hold
all 500 stocks. But funds tracking most other indexes typically track
their index by sampling. That is another source of tracking error that
varies from fund to fund.

Different funds have different expense ratios. That means that even if
their tracking were otherwise perfect, some funds (with higher expenses)
would underperform other funds (with lower expenses).

Some ETFs, like SPY (S&P 500 Depository Receipts, aka SPDRs) are
structured as unit investment trusts, and are legally prohibited from
reinvesting dividends they receive from stocks except quarterly. This
is referred to as "cash drag", because they must keep the dividends in
cash, which generally drags down the performance of the funds.

I think that's enough to start with.

--
Mark Freeland

Re: index fund: how to select

some companies will charge more for the same index fund, so the fund
with lower expenses wins.

some indexes are matched stock for stock, some are matched with
sampling of stocks in the index.

S&P 500 will probably be matched (index fund will hold all 500 stocks
in index). In addition this index is "cap weighted", so larger
companies will influence index more than smaller companies within the
S&P 500.

Dow 30 funds will probably be matched, but the Dow Jones "index" is not
cap weighted, to my best understanding.

S&P has a mid cap 400 index and a small cap index as well (I think).

Wilshire 5000 is actually a pool of more than 5000 stocks. Most fund
companies will not own all ~5500 stocks which make up this index. They
will sample select the stocks to hold to approximate the index.
Therefore if two mutual funds are Wilshire 5000 tracking, they may be
sampling different stocks and this will account for the differences in
return.

Wilshire 4500 is the pool of stocks in Wilshire 5000 MINUS the stocks
of the S&P 500. I remember reading on this a few times and it was
documented the S&P 500 accounts for around 66% of the return of the
wilshire 5000 because the wilshire index is also cap weighted (larger
companies influence performance more than smaller ones).

Russell 2000 is an index managed by another group of people which is
similar to wilshire 4500 (tracks mid and small cap companies). But
because there is a different group of people choosing the stocks in the
index (Russell 2000 and Wilshire 4500 will probably overlap
considerably) performance will be similar, but different based on
expenses, how the index is tracked (matched or sampled), plus the
actual stocks chosen.