Though investors' love affair with the ubiquitous

S&P 500

index may be waning, you'd think they'd still consider a free index fund -- i.e., no annual fees -- a pretty good deal.

Apparently not.

The

StockJungle.com S&P 500

fund, billed as a no-fee index fund, has attracted only about $800,000 in assets since its Nov. 19, 1999 launch, despite a promise to keep its annual expense ratio at zero.

But maybe investors know there's no such thing as a free lunch. The StockJungle fund, as it turns out, isn't actually free.

Because of the fund's small-asset base, it can't possibly go out and buy the 500 stocks that make up the index. Instead, the fund invests its assets in

Standard & Poor's Depository Receipts

(SPY) - Get Report

. The receipts, otherwise known Spiders, are exchange-traded funds that track the S&P 500 index. Spiders charge 0.12% of assets as annual expenses.

Guess who's footing the bill for the Spiders' expenses? Yes, it's the StockJungle.com shareholders who signed on for a no-fee fund. The Spiders' 0.12% annual costs come out of the StockJungle.com fund's assets.

StockJungle.com says it considers the Spiders' annual expenses a transaction cost which it never planned to absorb. Fund transaction costs, which include commissions on purchases and sales of stocks, aren't typically disclosed to shareholders.

"The transaction cost of actually managing the fund are not disclosed, but they are generally accepted," says StockJungle.com President Michael Witz.

Witz insists that the StockJungle.com fund is still a low-cost alternative. Indeed, S&P 500 index funds charge investors an average 0.6% in annual expenses. But several, including the

(VFINX) - Get Report

Vanguard 500 Index fund, charge 0.12% or less. And none of them promised a mutual fund on the house.

StockJungle.com's Web site says it will eat the brokers commissions for buying the Spiders. But it seems to imply other fees are waived. "While the fund will, of course, incur expenses, we have contractually agreed to waive all management and other fees to provide our investors with an S&P Index Fund with a total expense ratio of 0.0%," the

Web site says.

"The only way they could reimburse that ... is to put money back into the fund, and they can't do that," says Jonas Ferris, co-founder of

Maxfunds.com

, a Web site that tracks small and obscure funds.

Witz anticipates that the firm won't be able to buy stocks directly until it has about $10 million in assets. "As a long-term strategy, our hope is to have a solution so that our long term doesn't involve investing in Spiders," he says.

Considering that $232 billion is indexed to the popular benchmark, the StockJungle.com index's $800,000 is barely a drop in the bucket. Most established fund companies won't even launch a fund with less than $1 million in seed money, and an industry rule of thumb says it takes $100 million in assets before a fund is profitable. Witz says that if he had to do it again, he would have waited until the fund had raised enough assets to make the strategy work.

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Why can't Culver City, Calif.-based StockJungle.com give its fund away?

For one, the fund had the bad luck to go public just as the

Nasdaq 100

was eclipsing the S&P 500 as the market pacesetter. The technology-dominated Nasdaq 100 gained 102% in 1999, while the S&P 500 rose a more modest 21%.

And inflows have gone the same way. S&P index funds took in $2.5 billion in January, according to Boston's

Financial Research

. By comparison, tech funds nabbed $9 billion.

There may also have been some intangible factors at play. "People are probably reluctant to invest with a company that calls itself StockJungle," says

Morningstar

senior analyst Scott Cooley.

StockJungle launched its fund lineup in November with four mutual funds, including the S&P fund. Additionally, the firm launched the

Community Intelligence

fund, which invests in securities recommended by self-described analysts on its message boards. The firm also runs a

Pure Play Internet

and

Market Leaders

portfolio.

Morningstar's Cooley agrees that investing StockJungle.com's index assets in Spiders makes sense because of the limited assets involved. But it is highly unusual, he says. Other small index funds lump their assets into larger index funds run by an outside manager. For example,

X.com

, another firm with a loss-leader S&P 500 index fund, has added its assets to a pool of S&P index assets at

Barclays

, for which it is charged 0.05% annually. X.com won't disclose how big its fund is.

Other observers say StockJungle isn't delivering what it promised. "It's really a fund of funds," says Ferris.

As originally published, this story contained an error. Please see

Corrections and Clarifications.