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An enhanced index fund seems like a straightforward concept: Outpace an index without increasing the risk profile of the fund. Too bad it hasn't turned out to be the case.

A majority of enhanced index funds haven't beaten the indices that are their benchmarks since their inceptions. The problem: Most of the funds use quantitative models that point to attractive parts of the market. For the past few years, the stocks these models favor tend to be

value and smaller companies, which haven't exactly shot the lights out relative to other sectors.

"Almost all of them try to buy growth on the cheap,'' says Scott Cooley, senior analyst with

Morningstar

.

In fact, out of the 39 enhanced index funds, just 11 have beaten their respective indices since inception, reports fund tracker

Wiesenberger

of Rockville, Md. An enhanced index fund purports to beat a given index while maintaining the same risk characteristics. Some do it through stock picking, while others use futures and options and bonds to ferret out additional returns.

What's more, these enhanced funds tend to have higher expenses and taxes than run-of-the-mill index funds because of the more-active management.

It's hard to know exactly where many of the enhanced index funds have fallen short of their indices, because they're based on proprietary computer models with "50 to 60 variables," Cooley says. But the contrarian streak that seems to cut through most of them has played a part.

In the mid-1990s many of the models also favored small and mid-cap stocks, which were getting trounced by the

S&P 500. Now they're tilting toward value.

For example, the

(PSTKX) - Get Report

Pimco StocksPlus fund, run by legendary bond picker Bill Gross, uses the S&P 500 as its launch pad by buying futures and contracts of the index. It's able to track the performance of the index that way without actually buying the securities in the index itself, minus the cost of the contracts. Because it's not actually buying the stocks themselves, the fund is left with cash on hand to invest in junk bonds. The income produced by the bonds is supposed to be enough to cover the cost of the contracts plus provide a little extra oomph to best the index.

Though the fund has had moments of success, after expenses it has failed to keep pace with the mighty S&P -- since its 1997 inception, Pimco is up 272.2% to the S&P's 272.9%. The fund got whacked early on due to falling interest rates knocking off much of the yield on junk bonds. The fund does well in a high and steady interest rate environment where it can consistently pick up yield from the bonds.

Similarly, the

(SBEPX)

Smith Breeden U.S. Equity Market Plus fund applies the same strategy, but uses bonds backed by mortgages to add zip to the portfolio. It holds onto the cash and reinvests it in mortgage-backed bonds. The fund managed to beat its index, gaining 315.4% since its 1992 inception to the S&P's 312.2%.

The

(PYMRX)

Payden & Rygel Market Return fund also buys futures and options contracts, but invests its cash in high-caliber bonds. It's lagged behind the index 130.8% to 154.1% on a cumulative basis since inception.

Other enhanced index funds seek to best the indices through stock picking, so they won't necessarily hold onto every single stock in the index and may even go outside the index for stock picks.

At the $7.6 billion

(AMADX) - Get Report

American Century Income & Growth fund, one of the funds that actually has kept pace with its index and then some, portfolio manager John Schniedwind says the fund tries to duplicate the risk profile of the S&P, while beating its returns. Recently, it hasn't kept pace, but since its 1990 inception, it's beaten the index by almost eight percentage points cumulatively.

American Century Income & Growth looks for bargains, and lately it has been trawling the utilities and financial sectors. It is underweighted in technology and media relative to their representation in the S&P.

"The model has a bias towards value more recently," he says.

Investors should proceed with caution, since these funds haven't lived up to their promise of beating the index. Even the ones that have managed to eke out gains have done it with substantial tax consequences. Their frequent trading and options buying can bring Uncle Sam calling.

"Investors should never consider a fund like this for a taxable account," Cooley says.

In recent years a group of leveraged index funds, mainly run by

Rydex

,

ProFunds

and

Potomac

, have entered the market, but they're a little different than enhanced index funds. Leveraging enables them to beat the S&P when the index is rising, but it causes greater losses when the index falls.