This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Faith in Index Funds Rests on Flawed Research

Stocks in this article: PREIXSWSSXVGHCXIYHEGLBXVGTSX

Should you avoid index funds? Hardly. Low-cost index funds can be efficient. But it is important to keep in mind that all funds -- "whether index or active" -- have strengths and weaknesses. Russel Kinnel says he owns a mix of index and active funds. If you are a savvy investor who looks for low-cost funds, you can do well with either index or active funds, he says.

Many investors have been shifting to index funds lately for the wrong reasons, says Kinnel. He notes that in 2008 the S&P 500 lost 37%, and active funds performed about in line with the benchmark. Investors had reason to be disappointed with funds of all kinds, but much of the ire focused on active portfolio managers. "Investors thought that portfolio managers should have shifted to cash before the downturn," says Kinnel.

But the idea that managers can time the market perfectly is unrealistic, says Kinnel. Under SEC rules, most funds are not permitted to make massive swings to cash. Funds must live up to their names. So if a fund has the term "small-cap" in its name, it must keep 80% of the portfolio in the asset class. Such funds are bound to sink in market downturns.

Just as the exodus from active stock funds was motivated partly by irrational considerations, investors have also been making panicky moves with bond funds. While active stock managers about matched the benchmarks in 2008, active bond funds trailed badly. In 2008, the Barclays Capital Aggregate bond index gained 5.2%, and the average intermediate-term bond fund lost 3.7%. Even PIMCO Total Return (PTTAX), which is run by bond star Bill Gross, gained only 4.3% and trailed the benchmark by 0.9%.

You would think that angry shareholders should have dumped the PIMCO fund and shifted to index funds like Vanguard Total Bond Market Index (VBMFX), which returned 5.1% for the year. Instead, shareholders decided that Gross was a hero at a time when stocks had lost so much. Investors promptly poured tens of billions of dollars into active funds from PIMCO and other companies.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,461.32 -153.49 -0.92%
S&P 500 1,927.11 -14.17 -0.73%
NASDAQ 4,382.8470 -36.6310 -0.83%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs