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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: More Index funds ????'s Date: 2/3/2003 8:28 PM
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Index funds in fact buy high and sell low whenever they replace a stock in the index. They rid themselves of the slackards {your outa here} and replace with a stock that has shown to be the new rising star. He continues to assert that the replacement stock will then have a above average drop over the next year as it has peaked out.

Yes...dear Mr. Ric Edelman certainly contends this to be the case. But if this were consistently the case, wouldn't index funds consistently under-perform managed funds? Since the good index funds -- especially in the large-cap world -- consitently out-perform managed funds, I think this argument is full of hot air.

Taxes on a Index fund are only deferred {at best} yearly and will have a much larger tax due when sold, as opposed to a regular fund that one would be taxed yearly. Also, in a down market shares inside the index would have to be sold for those leaving the fund. - I don't know what he believes the difference is here as
I thought that was what all funds do.


Taxes are deferred...and that is a *good* thing. It means you are keeping the money and letting it grow more through the power of compounding. Eventually taxes have to be paid...but last I knew, the Vangaurd S&P500 fund (VFINX) had about $8 billion in deferred capital losses...it will take a lot of gains to wipe all of that out, so I would not be terribly worried.

For some of the other index funds (i.e. Total Market - VTSMX), there are Exchange-Traded Funds (ETF's; VTI in the case of VTSMX) that can be used to wipe out the capital gains in many cases.

And you are ight...there is no difference between the need to sell stock as shares of the fund are redeemed for an index fund vs. a managed fund.

I understand that others have spokan to the fact that some indexes such as the S&P 500 may work better as a Index fund than say a small capital growth since as a general rule there would be less turnover.

Turnover is one issue. Another is the ability to easily buy all of the stocks in the index in very nearly the right proportion. With small-cap indexes, one or both of these might be difficult. With the Total Market Index -- which tracks the full stock market of many thousand stocks -- the index funds only hold a sampling of the stocks. That sampling might be 3000 stocks, but it is still just a sampling leading to the possibility of increased "tracking error" -- the difference between the return of the index and the return of the index fund.

One thing to remember was something you stated up front -- "He admits that he is a advocate of mutual funds, and makes a good share of his income from promoting them." He makes no money from promoting index funds...so I would be inclined to think his dislike for them has at least a little bit to do with the padding of his wallet...

Just my thoughts...

ACME
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