enhanced index funds

Major drawback - high (or at least higher) turnover. This is in comparison with cap (well, free-float)-weighted index fund. By definition, the conventional index fund measures/represents the average performance of a dollar in the market (i.e. the index represents 1/Nth of the market, pro-rata). Anything else is an attempt to beat the performance of the average dollar.

IMHO, this includes fundamental indexes, which seem to me to a simple form of enhanced indexing. Enhancement can include picking "better" companies in the same sector (e.g. Pepsi instead of Coke) or by overweighting stocks or sectors.

The enhancement can be static (fundamental indexes never change their formula for selecting/weighting stocks), or dynamic - continually changing the heuristics as the market gradually evolves over time.

The concern I have with Fidelity specifically is that they've been there, done that. Fidelity Disciplined Equity was created by Brad Lewis as an enhanced index fund (though it wasn't called that), which used the first form of enhancement I gave (stock substitution). Stock Selector, also created by Lewis, was more wide ranging, using both substitution and weighting variations. The funds did well for awhile, but then fizzled, and Lewis left.

On the other hand, Montgomery over at Bridgeway has been doing a great job with quants for years.

Mark Freeland snipped-for-privacy@sbcglobal.net

One fund I've been tracking (not owning) since it's inception 18 months ago is PRF, which is a fundamentally weighted index for the S&P 500. It does have a higher expense ratio of 0.79%. It is based on a model that has been back tested to produce a 2% additional return over the S&P 500.

I like the theory behind fundamental weighting a lot. The actual practice has been, well, interesting. Last year, PRF gained 3.6% more than the S&P 500. This year, only 0.9% over the S&P 500. Although, if you think about it, that will put it on track to a S&P 500 + 2% gain for the year.

As for turnover, it is only rebalanced once a year.

-- Doug

funds?

I been looking at some of the funds offered by Dimensional Funds (DFA) and wisdom tree. I am probably going to buy some of those just to have those in my portfolio. Right now everything I have is in low cost traditional index funds offered by vangaurd. But I dont see why one shouldnt have 15-20% of there portfolio in so called enhanced index funds. My 2 cents....

You have to sign up with a DFA-approved registered investment advisor and have the funds under his umbrella to be able to buy into DFA.

In looking at the DFA expense ratios, it's doubtful that the cost of the DFA-approved advisor is included. Rather, I would expect that the advisor's fees/commissions are piggy backed on top of the expense ratios.

Two questions:

1. What is a representative cost of having the advisor, and how does the investor pay it?
2. Are there any charts that show the impact of those costs on long-term returns?

-HW "Skip" Weldon Columbia, SC

An index modification could be completely formulatistic such as the class "Dogs of the Dow".

But how is the advisor paid?

Elizabeth Richardson

Runs the gamut of the services of a financial planner: fee-based and/ or commission-based; flat fee, by the hour, or a percentage of assets.

Skip as I think you know I use these funds in my practice and I've seen fee schedules from some other advisors that use them. There's a range and it almost always varies by account size. I'd say a typical advisor fee would be 1.0%-1.2% annually as a starting point, with some as high as 1.5%. And dropping as low as

Thanks for all the responses. I think I'll just stick with plain old index funds for now.

Anoop