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
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Why It Pays to Own More Than One Index Fund

NEW YORK ( TheStreet) -- Seeking to top the S&P 500 and other traditional benchmarks, ETF companies have developed a host of new index funds. While some have been duds, many appear to be winners.

Among the top performers are equal-weight and fundamental funds. Large-cap funds that have outpaced the S&P 500 by a comfortable margin during the past five years include Guggenheim S&P 500 Equal Weight (RSP) and PowerShares FTSE RAFI US 1000 (PRF), a fundamental fund. PowerShares FTSE RAFI US 1500 (PRFZ - Get Report), a small-cap fundamental fund, outdid the S&P 600 small-cap benchmark.

Should you toss out your old-fashioned index funds? Not necessarily, says Sheldon Jacobs, author of "Investing without Wall Street" (John Wiley & Sons).

Jacobs says that traditional S&P 500 funds have excelled during some periods, while at other times fundamental and equal-weighted strategies have shined. To avoid lagging, he suggests holding a diversified mix that includes several kinds of index funds.

Jacobs notes that the S&P 500 was a star of the 1990s bull market. During the last five years of the decade, the S&P 500 returned 28.6% annually, outdoing most actively managed funds by a wide margin.

The equal-weight ETFs did not exist at the time. But there was a comparable mutual fund, Invesco Equally-Weighted S&P 500 (VADAX). It trailed the S&P 500 by 9 percentage points annually during the 5-year period.

The reason for the benchmark's stellar showing in the 1990s can be traced to its structure. Like most benchmarks, the S&P 500 weights its holdings according to market capitalizations. Under this system, stocks with larger market value carry greater weights.

Apple (AAPL), currently the biggest stock in the S&P 500, accounts for 4.4% of the assets, while car dealer AutoNation (AN) accounts for 0.01%. As a stock rises, the weighting increases.

During the late 1990s, a small number of big technology stocks came to dominate the S&P 500. As they soared, companies such as Microsoft (MSFT) and Cisco Systems (CSCO) came to account for a huge weighting in the benchmark.

By 1999, technology represented 39.6% of the S&P 500. The strong showing by a handful of stocks pulled the index to new heights. Then when technology crashed in 2000, the former stars pulled the benchmark down hard. Today technology is 18.3% of the benchmark.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
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!
SYM TRADE IT LAST %CHG
PRF $92.50 0.00%
PRFZ $102.68 0.00%
RSP $82.01 0.00%
AAPL $127.15 0.59%
FB $81.18 -0.04%

Markets

DOW 18,135.72 +38.82 0.21%
S&P 500 2,101.04 +2.51 0.12%
NASDAQ 4,982.8090 +15.6680 0.32%

Partners Compare Online Brokers

Free Reports

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