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Investors love index funds
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April 3, 1997: 8:11 p.m. ET
Experts warn that funds based on S&P 500 offer no guaranteed return
From Correspondent Ceci Rodgers
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CHICAGO (CNNfn) - Equity mutual funds based on the Standard & Poor's 500 index continue to attract investors, even as the stock market has declined.
As the popularity of these funds increases, however, fund managers worry that some investors falsely believe they offer guaranteed returns.
Even though index funds don't make for a foolproof strategy, investors remain downright exuberant about mutual funds that mirror the S&P 500 stock index.
Through March, almost $2 billion has been poured into Vanguard's index fund, the biggest S&P fund and the second-largest U.S. equity fund.
Investors have fallen in love with index funds because they have outperformed 75 percent of actively-managed funds over the past three years.
"The vast majority of actively-managed funds are frankly overpriced," said Don Phillips, president of Morningstar. "That's one of the compelling benefits of indexing. You can get equity exposure at very low cost."
According to Vanguard, its index fund attracted more money in the first week of April than the same period a month ago.
Jay Trees, managing director of Trees Front Associates, said investors are doing the opposite of what many would expect during a correction: they're shifting money out of cash and money markets into index funds, betting that the market will soon rebound.
The danger, he says, is they are focusing only on the short-term. (124K WAV) or (124K AIFF)
Investors are behaving as they did following the 1987 stock market crash -- buying on stock market weakness.
"If you believe in this economy, in the long run, it'll end up higher than before," said investor George Smith. "I just wish it would happen quicker. I'm over here to decide where to put the new money."
Vanguard actually tried to discourage investors earlier this year by warning that its index fund would not outperform other funds forever.
Still, investors seem caught in a wave of enthusiasm over the funds, all but ignoring the undertow of a market correction.
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The Vanguard Group
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