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Vanguard Goes the Sector Index Fund Route

You just can't have too much of a good thing. Not according to Vanguard, anyway.

The fund family that offered the first index funds to investors is now set to offer 11 more -- plus another nine (count 'em) exchange-traded funds to boot. Both the funds and ETFs are expected to launch in the fall.

Investors who just can't decide whether to invest in Vanguard's (VFINX) S&P 500 fund or its (VTSMX) Total Stock Market fund will now be able to split the difference -- among Vanguard's new offerings is one large-capitalization fund. The large-cap fund will track the Morgan Stanley Capital International (MSCI) US Prime Market 750 index, which currently represents the largest 88% of the total stock market.

The remaining 10 funds are sector-specific, based on the MSCI U.S. Investable Market 2500 index. There will be sector funds for energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecommunications services and utilities.

Adherents to index investing may shudder at such specific offerings -- after all, the idea of indexing is to invest on the cheap and garner the returns of the market -- not try to outpace the market. Surely these funds will be used by investors betting on certain sectors to outperform the overall market -- a market-timing strategy that flies in the face of most indexing zealots.

"Sector fund holdings, if any, should represent a very modest portion of an individual's long-term, balanced portfolio," Gus Sauter, Vanguard's chief investment officer, said in a statement. "However, some institutional investors and financial intermediaries find sector funds to be useful in more sophisticated investment strategies."

Viper attack

For those investors more interested in the do-it-yourself (and on-the-cheap) approach, Vanguard is also rolling out nine new Vipers -- the oh-so-catchy acronym for Vanguard Index Participation Equity Receipts. The new Viper shares will track the nine new index funds, and the following pre-existing index funds: value, growth, mid-cap, small-cap, small-cap value, small-cap growth, European stock, Pacific stock and emerging markets.

Each of Vanguard's Vipers essentially amounts to another share class of the index fund it tracks. The underlying portfolios are exactly the same, although the fee structure is different. Like other ETFs, Vipers are bought and sold on exchanges, which means you'll have to go through a brokerage account and pay its transaction fee each time. The expenses on ETFs are generally lower than on mutual funds, even by Vanguard's super-low cost standards. But investing in Vipers can get pricey if you're dollar-cost-averaging (investing a fixed amount at regular intervals), because the transaction costs can get high.

Vanguard currently has just two Vipers -- based on its Total Stock Market and Extended Market index funds. Those Vipers, though -- launched in May 2001 and January 2002, respectively -- currently have some $2 billion in assets.

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