"Of Mutual Interest"-Jason Zweig, Investing Columnist for "Money" Magazine
Tuesday, September 11, 2007PAUL KANGAS: In our "Of Mutual Interest" segment tonight, an investment that bills itself as an index fund only better. The question is, is it better? Joining us again tonight is Jason Zweig, investing columnist for "Money" magazine and author of "Your Money and your Brain." Jason, welcome back. Good to see you.
JASON ZWEIG, INVESTING COLUMNIST, MONEY MAGAZINE: Good to see you, Paul.
KANGAS: We're talking tonight about enhanced index funds. Just what are they and how are they different from plain vanilla index funds?
ZWEIG: Well, Paul, as you would guess from the name, an enhanced index fund doesn't try just to match the return of a market index like a regular index fund, but it tries to beat that return. And that's what the enhancement is there fore, that's what it's supposed to do. But the proof is in the pudding.
KANGAS: In other words they throw out bad performers in the index that they follow and keep the good ones, is that part of the strategy?
ZWEIG: Well, that can be. They may sample the companies that they feel are the best and throw some of the others out. They may use futures contracts and then put some of the remaining cash in short-term bonds. There's a variety of strategies they can use.
KANGAS: The allure of index funds for many investors is that they're cheap. What do you mean by cheap?
ZWEIG: Well, what I mean by cheap is cheap. If you buy a regular plain vanilla index fund, you can get your money managed for one-tenth of 1 percent of your assets per year which is rock bottom. It just doesn't get any cheaper than that.
KANGAS: So when these funds - so when these funds become enhanced involving managers, are they still cheap?
ZWEIG: No, sir. They become quite expensive for an index fund. The typical enhanced index fund is going to charge you four, maybe as much as 10 times what a plain index fund will charge. And that's a big premium to pay for the small chance that you're going to out perform.
KANGAS: Jason, when the markets are as volatile as they've been recently, doesn't an idea like this beating the market without much risk sound more appealing?
ZWEIG: Well, it sure does, Paul. It sounds pretty appealing to me, too. But what I'd like to see is some actual enhancement. And unfortunately if you look at the long term performance and the average performance of enhanced index funds, they don't on average deliver the upside as they promised mainly I would argue because the fees are too high.
KANGAS: How does an investor spot these types of funds? Do they always have the word enhanced or something similar in their names?
ZWEIG: Typically they do, Paul. You'll see things like enhanced index or index plus. You might see something like stocks and alpha. This sort of language is usually a tip off that the fund is an index that's trying to do better.
KANGAS: And look for that plus or enhance, the word enhance.
ZWEIG: Yeah. Those are the two most common terms, yeah.
KANGAS: So what do you recommend to investors when it comes to enhanced index funds like this Jason?
ZWEIG: Well, if you already own one, I don't think I'd sell it. Although you do want to make sure that you don't take an extra high tax bill. These funds can really give you a sort of kick in the pants on April 15th. The other thing is if you don't own them already, Paul, I do not particularly recommend them. I would much prefer a plain index fund that invests in just the S&P 500 or the total stock market.
KANGAS: Understood, Jason, as always it's been very informative having you on the program tonight. Thanks for joining us.
ZWEIG: Thank you, Paul, my pleasure.
KANGAS: My guest, Jason Zweig, investing columnist at "Money" magazine and author of "Your Money and Your Brain."
