Tuesday, July 6, 2010

S&P 500 Index Fund Comparison - Hint: Not All Index Funds Are Great!

Index funds have a lot of fans in the investing world, and it's easy to see why. They are known for their low expenses, and there's plenty of articles and studies that show index funds beat actively managed funds, but not all index funds were created equal.

Here are 6 index funds that claim to track the S&P 500 index. You'd think they'd be virtually identical. Think again.

I'm comparing these funds on only 2 parameters: Total fees (as reported by Yahoo! finance) and annual turnover rate.

Fidelity Spartan 500 Index Inv (FUSEX)

Fees: 0.10%
Annual Holdings Turnover (Jun 4, 2010) : 11.00%

Vanguard 500 Index Investor (VFINX)

Fees: 0.18%
Annual Holdings Turnover (Jun 4, 2010) : 12.00%

Schwab S&P 500 Index (SWPPX)

Fees: 0.13%
Annual Holdings Turnover (Jun 4, 2010) : 3.00%

DWS S&P 500 Index B (SXPBX)

Fees: 1.37%
Annual Holdings Turnover (Jun 4, 2010) : 9.00%

State Farm S&P 500 Index B (SNPBX)

Fees: 1.50%
Annual Holdings Turnover (Jun 4, 2010) : 5.00%

Rydex S&P 500 C (RYSYX)

Fees: 2.28%
Annual Holdings Turnover (Jun 4, 2010) : 58.00%

As you can see, not only are these funds are not equal but they are actually quite different. There's over 2% points difference in the fees, and over 50% difference in the turnover rate!

The fees I could understand, since some brokerages are going to charge more. One may not be as efficient as another, or maybe they just have higher marketing overhead. But the turnover is ridiculous on a fund that should track an index of a known 500 stocks. I mean, 58% turnover on an S&P 500 index is just insane!

There's no excuse for it. Well, I mean there is because they must be doing some fancy options or shorting voodoo in an effort to boost returns, but it isn't working. Just look at this comparison of the Schwab S&P 500 Index and the Rydex S&P 500 C:

Not only does the Rydex cost over 2% more in fees, but the turnover rate is 55% more (which means potentially higher taxes if you hold it in a taxable account) but its performance lags both the Schwab fund and the index it's meant to track!

I'm at a loss to explain why an informed investor would ever choose this fund. In fact, the performance of the Fidelity Spartan 500 Index Inv, Vanguard 500 Index Investor and Schwab S&P 500 Index is pretty much a wash:

So, I'd probably pick the Fidelity Spartan, unless only one of the others was available. But that's just me. ;-)


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