Thumbs Down: Indexing No-No's

Physician's Money Digest, November15 2004, Volume 11, Issue 21

For some investors, owning sharesin an index fund is downrightboring. They try to beat the marketinstead of matching it by choosingactively managed funds. But whenan actively managed fund becomes acloset indexer, you're probably payingan expense ratio of around 1.5%and not getting the better performancethat you're paying for. To seeif your fund marches in lockstep withits relevant index, check with Morningstar(www.morningstar.com), whichcan show you what the fund's correlationto its index is. Anything higherthan 95% is a red flag. You shouldalso check the expense ratio for anyindex fund you're looking to buy.Some funds charge 0.65% or more—compared with Vanguard's miserly0.18%—and then add insult to injuryby tacking on a front-end load.