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10 Index Funds Vying for a Spot in Your Portfolio

Index funds are often described as plain vanilla investments. These low-cost funds aren’t flashy and won’t make you rich overnight. Rather, they simply strive to deliver a similar return to the benchmark they are tracking, thereby offering consistent but not stellar returns over the long term. That’s one of the reasons why these funds sit at the core of millions of retirement accounts.

For 50-plus years, the gold standard for index funds has been the S&P 500, which uses market value to weigh its member companies. The S&P 500 has always competed against funds that track indexes like the Dow Jones Industrial Average or the Russell 1000, but over the last decade, competition has heated up from a series of new-fangled alternative indexes that focus on revenues, dividends, equal-weight strategies and something called a “fundamental” approach (more on that later).

With so many options to chose from, it’s difficult to decide which index fund can serve as the best foundation for a diversified portfolio. So, this week the fund screen takes a look at some of the more popular index funds as judged by their asset bases and from feedback from advisers. To perform this screen we suspend some of our usual search techniques. Instead of narrowing down a universe of funds, we simply list 10 index funds, with their year-to-date, three-year and five-year return numbers. We aren’t picking favorites here. It’s more of a scorecard for the next time you go fund shopping.

Usually, the difference in returns between one index fund and another is narrow. Typically, the gap in performance comes down to cost (i.e., the annual costs of one fund eating more of its returns vs. its competitor’s cheaper fees).

Yet, this year the difference in performance is much starker. Since the stock ticker market started rallying in early March, certain sectors and style-types have done better than others. According to Morningstar, small- and mid-cap stock ticker funds are some of the best performers right now along with sectors like technology (for more returns, see the table below).

But when it comes to index funds, investors need to be cautious about chasing short-term results. The tide can turn very fast in this universe. While small-caps may be outperforming this month, they could easily be trailing the S&P 500 next month.

“You don’t want to chase your tail,” says Paul Frank, president of Aviemore Asset Management in Old Chatham, N.Y. and the portfolio manager of the ETF Market Opportunity Fund (ETFOX).

For example, the Rydex S&P Equal Weight (RSP) exchange-traded fund takes all of the members of the traditional S&P 500 index and gives them the same 0.2% weighting. Typically, the S&P 500 can rise and fall depending on the fates of certain few large firms. But by equal weighting all the companies, even the smallest constituents can have an impact on returns. That can have a profound impact depending on the year. For example, while this ETF is greatly outpacing the traditional S&P this year, it has trailed that same benchmark during the previous three years. So chasing performance based on nine months of numbers could burn opportunistic investors if the smaller companies cool off.

As mentioned above, some funds use a “fundamental approach” that weights companies based on traditional valuation metrics like revenues and book value. The Schwab Fundamental U.S. Large Company fund (SFLVX) uses that proprietary strategy to rank its member companies. Up 34.8% year-to-date, the fund has also benefitted from a small company stock ticker bounce.

While the returns for both Rydex S&P Equal Weight and Schwab Fundamental are stellar to say the least, if smaller companies fall out of favor with investors those returns will shrink considerably.

Other funds are poised to take advantage of improving corporate returns. While these funds have kept pace with the S&P 500, they could prove to offer consistent returns as the recovery takes hold. RevenueShares, a $200 million family of exchange-traded funds, uses indexes that weigh companies solely based on sales figures. The flagship fund, RevenueShares Large Cap (RWL), is up a surprising 19.7% this year. Revenues are serving as a partial proxy for growth; so as investors become comfortable putting money back into the stock ticker market, they are flocking to the companies that are actually showing positive results. In other words: the companies that are more heavily-weighted in these indexes.

“Revenues over the long haul are a great indicator of a company’s health,” says Sean O’Hara, president of RevenueShares. O’Hara adds that after two years of companies slashing costs it’s finally starting to show up in their revenue numbers. “The first thing to change is always top-line sales.”

The Criteria: To find the 10 index funds below, we suspended our usual screening techniques. Here, we simply list ten popular funds we feel give investors a wide swath to consider. We did not consider a fund’s annual expenses or whether it charges a load.

The Future of Indexing?
Fund Ticker YTD


Source: Lipper
Note: Data as of August 27, 2009
n/a = funds haven’t been around long enough to fulfill data set.
PowerShares QQQ QQQQ 35.6 2.0 3.7 0.20
Schwab Fundamental U.S. Large Company SFLSX 34.9 n/a n/a 0.44
Rydex Equal Weight S&P RSP 30.4 -4.4 2.2 0.40
RevenueShares Large Cap RWL 19.8 n/a n/a 0.49
Vanguard Total stock ticker Market VTSMX 18.0 -4.7 1.4 0.16
iShares Russell 1000 IWB 17.2 -5.2 1.0 0.15
Vanguard 500 VFINX 16.2 -5.3 0.5 0.16
iShares S&P SmallCap 600 IJR 15.9 -4.0 3.1 0.20
SPDR Dow Diamonds DIA 11.2 -3.0 1.1 0.17
WisdomTreee Total Dividend DTD 10.6 -7.2 n/a 0.28

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