Your fund did not outperform its benchmark...

January 12, 2007 7:34 AM

Fund benchmarks vs. the fund itself. How do I invest in my fund's benchmark rather than the fund itself?

Everyone's heard that mutual funds rarely outperform their benchmarks in the long term. I think I've reached the end of my patience with seeing "Your fund had a good year but did not outperform its benchmark for the third straight year" on every prospectus I get. I'd like to dump a bunch of funds and shift the money to the benchmark (Russell 2000, etc) but I'm having difficulty figuring out how to do that. Do things like the Russel 2000 Small Cap have ticker symbols? If so, are they considered mutual funds or index funds or straight up stocks? To invest in them is it a simple matter of finding the ticker symbol and purchasing? Are there any potential negatives to doing this if your investment horizon is 20+ years?

posted by spicynuts to work & money (13 comments total)

The Russel 2000 is an index: a list of stocks. You can invest in it by buying an index fund: a mutual fund that tracks the index by investing in all of the stocks in the index. Index funds are widely considered better long-term investments than managed mutual funds, both because their fees are lower and because, as you say, no mutual fund manager can reliably beat the market.

You could also invest in all of the individual stocks yourself, but you would do worse than the index fund because you would end up paying more in transaction costs (e.g. brokerage fees).
posted by mbrubeck at 7:44 AM on January 12, 2007

They are called index funds. They are not actively managed by a person who makes decisions about what to buy and sell, but instead are set up to include all stocks of a certain predetermined type. For example, the Vanguard 500 is an index of the S&P 500. There are index funds for Small Cap Growth stocks, Mid Cap Value, etc. Vanguard has the lowest fees for their funds, so is generally the best bet.
Another option is Exchange-Traded Funds (ETFs), which are indexes of all kinds of things. Not only are there ETFs for the benchmarks you've seen, but also stocks from different countries, industries, etc.
IMHO, there are no negatives to investing in index funds, as long as you make sure to have some money in small-mid-large caps, growth and value, and US/foreign. The low fees alone make them a better deal than most actively-traded funds. It is true that some MFs will beat the benchmark sometimes, but not always, and how do you know ahead of time?
If your horizon is 20+ years, you probably should go with more aggressive foreign and small/mid cap indexes, as well as something like the Vanguard 500.
Good luck!
posted by annabkr at 7:46 AM on January 12, 2007

You cannot invest directly in a benchmark. The closest you can come is products that mirror the benchmark, but you will underperform by whatever fees you pay (which will be less than an actively managed fund).

This was easily googleable.
posted by stupidsexyFlanders at 7:47 AM on January 12, 2007

Index funds are a subset of mutual funds. So yes, they are index funds, and they are also mutual funds. They are not "actively managed" mutual funds, and consequently have a much lower overhead than the actively managed mutual funds you're currently invested in.

Like other mutual funds, index funds typically have a minimum requirement to invest in them. If you don't want to invest that much, you might also look into exchange-traded funds (ETFs), which represent a mix of companies like mutual funds do, but are traded like stocks, with individual shares, trading whenever the market is open, etc. There are ETFs corresponding to index funds, and there are also ETFs corresponding to actively managed funds. ETFs have a ticker symbol just like stocks do. The best-known ETF is Standard and Poor's Depository Receipts (confusingly, these are often referred to as SPDRs, pronounced "spiders," but the ticker symbol is SPY), which tracks the S&P 500.
posted by DevilsAdvocate at 7:48 AM on January 12, 2007

You want a SPDR. Check out symbols like QQQQ, SPY, AMEX:MDY, AMEX:XLK, IWV, IWW, etc.
posted by Tacos Are Pretty Great at 7:49 AM on January 12, 2007

This was easily googleable.

I know what an Index Fund is and thus do not need to google index funds. What I have been having trouble with is finding the ticker symbols for the benchmarks, which you have cleared up for me by telling me I cannot invest directly in the benchmark. I have several index funds such as an S&P 500, but I thought I could avoid the fees by buying the benchmarks directly. Thanks for the help.
posted by spicynuts at 8:06 AM on January 12, 2007

You can't avoid the fees but they are pretty small for the diversification benefit they provide. Vanguard charges something like 0.18% per year, or $1.80 per $1,000 per year for their S&P 500 index fund. Peanuts really.

This list shows their index funds. Click on any fund name and the ticker appears in the parenthesis at the end of the fund name on the website that comes up. Buy the funds directly from vanguard as you'll save transaction costs. They charge $10 per year on top of the expense ratio if you have less than $10,000 invested in each fund you own. So a $1,000 investment in their small cap index fund (NAESX) would cost you $12.30 while a $10,000 investment in the same fund would cost you $23.00.
posted by pegstar at 8:53 AM on January 12, 2007

What Tacos said... while the benchmark varies from fund to fund, it tends to be a well-known index such as the Dow Jones Industrials, S&P 500, Russell 3000, etc. Tacos has pointed out some good ones: SPY tracks the S&P 500, QQQQ tracks the NASDAQ 100, DIA tracks the DJIA. The benefit to these, as DevilsAdvocate said, is that they have low overhead and, as you note, actively managed funds don't tend to outperform consistently anyway.

I'm having a helluva time finding a thorough list of these, though... anyone have a table that shows "for index X, the following ETF(s) track its performance"?
posted by rkent at 8:55 AM on January 12, 2007

I'm having a helluva time finding a thorough list of these, though... anyone have a table that shows "for index X, the following ETF(s) track its performance"?

That is exactly what I want! Finding this stuff through my Fidelity or Vanguard interface is difficult for some reason.
posted by spicynuts at 9:36 AM on January 12, 2007

Also there are country-based indexes, which is what I am looking at now. I think a particular country is going to do well, so I want to check out, say, India, so I can look at BSE SENSEX (^BSESN), or China, (FXI) or whatever.

Yahoo has a very good (and new) tool for charting this stuff.
posted by Monkey0nCrack at 10:04 AM on January 12, 2007

sorry I misunderstood your question, spicynuts. As penance, here's a directory of ETFs, with corresponding benchmarks and tickers.
posted by stupidsexyFlanders at 10:14 AM on January 12, 2007

SPDR Index has been advertising all over NY. ETF Connect has good info too.
posted by Tacos Are Pretty Great at 10:54 AM on January 12, 2007

Actually, you can invest directly in the benchmark - such as the S&P 500 - by purchasing an amount of each of the 500 stocks, weighted proportionately by their market caps. Then you rebalance on a regular basis to keep your portfolio appropriately market-cap weighted.

If you have to pay a commission on every trade, though, you're not going to be able to outperform an index mutual fund like Vanguard, which employs full-time brokers doing nothing but performing these tasks for the fund, managing billions of dollars.

Also, quite a few of the freely accessible ticker-chart sites, such as Yahoo Finance, will let you chart a large number of benchmark indices. The symbols used all start with ^ (^DJIA, ^SPX) so that you don't confuse them with symbols standing for traded securities. So if all you're wanting to do is chart benchmarks, that's easily accomplished.

Finally, most of the ETFs and funds discussed here, apart the giant S+P funds, use representative indexing. That means they don't actually buy every single security in the benchmark - they buy a representative basket of securities. Representative indexing is interesting but probably more detail than you care about.
posted by ikkyu2 at 2:14 PM on January 12, 2007