3 Ways Not All Index Funds Are the Same

Price, process, and index variations all come into play.

Adam Zoll 27.06.2014
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The choice to use index funds rather than actively managed funds is a significant one, to be sure. And while actively managed funds may come in more varieties in terms of fund characteristics, strategies, and so on, index funds also have their differences, though some are more obvious than others. 

Cost Still Counts
Among the biggest differences with index funds is the fees they charge. Funds that are otherwise virtually identical--meaning they track the same index--can nonetheless produce different returns based on their fees. That's because fund fees are deducted from fund returns. So assuming two identical portfolios, the fund with the lower fees, and therefore the smaller bite taken out of returns, will deliver a higher total return to shareholders. (Index funds also may lend out some of their holdings to generate income for the fund and thereby lower their fees.)

To illustrate, let's look at funds that track the most widely used of all indexes, the S&P 500. Morningstar's database includes nearly 50 different mutual funds that track this benchmark (not including the several exchange-traded funds that do so), with expense ratios that run the gamut. Among the cheapest of these S&P 500-trackers are Vanguard 500 Index (VFIAX) and Fidelity Spartan 500 Index (FUSVX), both of which have share classes that cost just 5 basis points (0.05%) per year based on a minimum investment of $10,000. Toward the other end of the spectrum are funds such as Transamerica Partners Stock Index (DSKIX), which tracks the same index but charges 65 basis points--more than 10 times what the cheapest funds charge.

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About Author

Adam Zoll  Adam Zoll is an assistant site editor with Morningstar.com

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