Positive article on Wired Index Fund (which holds G*)
moneycentral.msn.com
Posted 3/16/99
Mutual Funds
A new high-tech contender in the index fund craze
The new Wired Index, soaring 70%, leaves the S&P 500 in the
dust, and the chic index fund Flight Guinness, holding its hottest
stocks, is the new fund to watch.
By Timothy Middleton
In his new book, "Common Sense on Mutual Funds," John C.
Bogle calls indexing "the triumph of experience over hope." The
fund complex he founded, Vanguard Group, has grown to No.
2 in the industry largely on the strength of indexing, and
Vanguard is attracting assets faster than the leader, Fidelity
Investments.
Indexing is nothing more than slavishly imitating a market
benchmark; the usual one is the Standard & Poor's 500
(SPX). But indexes routinely perform better than most active
strategies. Since 1995, Bogle notes in his book, the S&P "has
outpaced a stunning 96% of all actively managed equity funds."
The Wilshire 5000 index has done better than 86%.
But Vanguard is the first to admit that the S&P's recent
performance is a fluke, attributable to the huge weighting it
gives to about 50 names, including MSN MoneyCentral
publisher Microsoft (MSFT), which happen to be in vogue. In
years to come, says Brian Mattes, Vanguard's spokesman,
shareholders of Vanguard 500 Index (VFINX) will "come out
ahead of two out of three, or maybe three out of four, of other
investors."
Obviously, that's still better than most. But indexing has
become so popular -- last year such funds, which amount to
less than 7% of the equity total, attracted 25% of net new cash
flows -- that investors are tweaking the concept to get even
more out of it. These days there's almost nothing you can't
index. That means, however, that indexing isn't a no-brainer
anymore. It takes nearly as much homework as picking an
actively managed fund.
The new fund on the block
The newest wrinkle is the Guinness Flight Wired Index Fund
(GFWIX), launched in December. If you believe in the
information economy, this thing was designed specifically for
you.
As Wired magazine wrote when it launched the index two
years ago, "Our aim is to do for the information age what the
Dow did for its predecessor: Track the growth of the
companies that are building the new economy -- not just the
usual high-tech suspects, but a broad range of enterprises that
are using technology, networks and information to reshape the
world."
The index comprises 40 names, and many are the usual
suspects: America Online (AOL), Cisco Systems (CSCO),
Intel (INTC), Lucent Technologies (LU), Microsoft and Sun
Microsystems (SUNW). But there are plenty of others, such as
American International Group (AIG) the big insurer; Charles
Schwab (SCH), the discount broker; Marriott International
(MAR), the hotelier; and State Street (STT), a leader in
pension-plan administration.
"For the everyday
investor, it makes
sense to try to get
a core market
position in an index
fund, and then try
to add some funds
where the manager
has some latitude
in making
investment
decisions for you."
-- Steve Savage,
Value Line Mutual
Fund Survey
In the last year, the Wired Index surged more than 70% --
more than doubling the gain of the S&P 500. Inspired by this
performance, Guinness Flight launched a fund tied to the index.
You can now buy the fund through Charles Schwab, Jack
White and other fund superstores.
Many others to choose from
Morningstar counts nearly 250 index funds. Most track the
S&P 500 or the Wilshire 5000, but there are plenty of other
options. ASM Index 30 (ASMUX) follows the Dow.
Bridgeway offers ultra-large and ultra-small companies. Domini
Social Equity (DSEFX) is for tree-huggers. Wilshire, a leader
in parsing stocks according to style -- growth vs. value as well
as large vs. small -- has eight funds, such as Wilshire Target
Large Company Value (DTLVX) and Wilshire Target Small
Company Growth (DTSGX).
This proliferation of product aligns with the current fashion for
asset allocation. That's the belief, buttressed by academic
studies, that the choice of asset class -- large companies vs.
small, for example -- makes more difference in the returns
you'll get than stock selection within the class. So if you
believe, as many professors do, that value stocks outperform
growth over the long haul, or small companies do better than
large, you can place your bets accordingly.
If you're not an asset allocator, indexing is just a no-effort way
to get exposure to the market with some of your money, while
you invest the balance of it actively. "For the everyday investor,
it makes sense to try to get a core market position in an index
fund, and then try to add some funds where the manager has
some latitude in making investment decisions for you," says
Steve Savage, editor of the Value Line Mutual Fund Survey.
Either way, indexing requires that you keep a sharp eye on
expenses. Indexers have an explicit mandate not to beat their
benchmark, so in practice they trail it by their own costs.
Vanguard 500 Index has an expense ratio of 0.19%; the
average equity mutual fund subtracts about 1.5%, or eight
times as much, from your capital.
Mutual Funds
Recent articles:
• Crabbe Huson
Special is a contrarian
nightmare 3/9/99
• One PBHG fund
rides high risk to top
10 returns 3/2/99
• Texas Capital aims
for bull's eye with
small caps 2/23/99
more...
In this light, the new indexing wave doesn't look too sharp. A
lot of broker-sold index funds have very heavy expense ratios
-- 0.39% at Munder Index 500 A (MUXAX), 0.61% at
Nations Equity-Index A (no ticker) -- and specialized funds
can charge still more. Wilshire Target Small Growth charges
1.28%. The Wired Index Fund has an expense ratio of 1.35%.
Hidden costs
Even plain-vanilla index funds have a hidden expense, which is
the cost of trading the portfolio. Commissions don't show up in
the expense ratio; they simply detract from performance. More
than a dozen companies are added to the S&P 500 each year
to replace companies that have been acquired or dropped.
Each time, index funds incur commission expenses to adjust
accordingly.
In this regard, only one index fund combines a low expense
ratio with minimal commissions -- Vanguard Total Stock
Market (VTSMX). It replicates the Wilshire 5000 Index,
which is actually a universe of the 7,800 U.S. stocks that trade
regularly. Turnover is an insignificant 2%. At Index 500, it's
5%, and at the specialty funds it's on a par with actively
managed portfolios -- 68% at Dreyfus MidCap Index
(PESPX), for example.
Low turnover also means few taxable gains, which means even
fewer of your investment dollars slip away. For your Rip Van
Winkle money -- the stuff you don't even want to think about
for 20 or 30 years -- Total Stock Market has no rival.
Terms of Use, and Privacy Policy. © 1996-1999 Microsoft
Corporation and/or its suppliers. All rights reserved.
|
