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Hey guys,

I just started a Coverdale account for each of my five kids for their college education. They won't need any of this money for 15-17 years, so I'm looking at equity funds. Each daughter has a seperate account set up through E*trade and I'd like to fund one mutual fund per account. Each would get a small monthly contribution ($100). Five funds should allow a modicum of diversity.

In the broadest strokes I was planning on the following types of funds:

1)S&P 500 index or Wilshire 5000 index
2)Russll 1000 Growth Index
3)S&P/Citigroup BMI World Ex US Index
4)S&P Midcap 400
5)? (whatever seems like a good value that adds diversity and low risk)

I would like to compare a few index funds. Since I'm focusing on index funds, no-load, no-fee funds are my first rerequirement. Of course, low expense ratios are better; a relatively low initial investment would also be great.

I'm having trouble comparing funds from different families. Just because the name of the fund has "Large Cap Index" doesn't mean it really follows the S&P 500 index. What I would like is a list of the most common indices and the mutual funds that accurately follow them. Any suggestions? MF has a series of explanations and examples of the most common indices at: http://www.fool.com/school/indices/introduction.htm . The choices are rather limited, though. For instance, there's only 1 fund (Vanguard) listed that tracks the Russell 2000. Surely there's more than one Russell 2000 index fund out there. I'm looking for a more complete listing so I can find fund families that I can invest in through E*trade. As of now I'm reduced to blindly stumbling across a fund with a promising name, then reading the prospectus to see how the fund invests its money.

If you have specific recommendations for any funds or the types of indices I've chosen, I'd appreciate the input there as well.

Boone
College Station, TX
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No. of Recommendations: 1
Greetings Boone,

First and foremost there is an index funds board at http://boards.fool.com/Messages.asp?bid=100111 that would likely be a better place to post your question.

I just started a Coverdale account for each of my five kids for their college education. They won't need any of this money for 15-17 years, so I'm looking at equity funds. Each daughter has a seperate account set up through E*trade and I'd like to fund one mutual fund per account. Each would get a small monthly contribution ($100). Five funds should allow a modicum of diversity.

In the broadest strokes I was planning on the following types of funds:

1)S&P 500 index or Wilshire 5000 index
2)Russll 1000 Growth Index
3)S&P/Citigroup BMI World Ex US Index
4)S&P Midcap 400
5)? (whatever seems like a good value that adds diversity and low risk)

I would like to compare a few index funds. Since I'm focusing on index funds, no-load, no-fee funds are my first rerequirement. Of course, low expense ratios are better; a relatively low initial investment would also be great.

I'm having trouble comparing funds from different families. Just because the name of the fund has "Large Cap Index" doesn't mean it really follows the S&P 500 index. What I would like is a list of the most common indices and the mutual funds that accurately follow them. Any suggestions?


http://www.indexfunds.com/data/FundScreener.php and http://www.morningstar.com/Cover/Funds.html would be a couple of places where you could screen for funds though the Morningstar one has a better one if you are premium member I think. http://www.mfea.com/ also has a link with low-cost initial investment that may be worth a look.

I'd likely note that you aren't going to find many cheap index funds that aren't going to ding you with fees in a sense. My own suggestion would be that if you have the funds to look at something like Vanguard LifeStrategy Growth(VASGX) which is a fund of funds that covers many bases you seem to want but does this through 1 fund and doesn't carry any low balance fees like Vanguard's index funds. I believe T. Rowe Price and Fidelity have similar funds in terms of Target Retirement like funds which may be worth considering as something with a balanced allocation if you are so inclined.

MF has a series of explanations and examples of the most common indices at: http://www.fool.com/school/indices/introduction.htm . The choices are rather limited, though. For instance, there's only 1 fund (Vanguard) listed that tracks the Russell 2000. Surely there's more than one Russell 2000 index fund out there. I'm looking for a more complete listing so I can find fund families that I can invest in through E*trade. As of now I'm reduced to blindly stumbling across a fund with a promising name, then reading the prospectus to see how the fund invests its money.

I would suspect that that is highly out of date since no Vanguard fund follows the Russell 2000 anymore. Most of Vanguard's US stock index funds follow an MSCI index or an S & P index I believe. Try the indexfunds' screener which is free for one idea or the MFEA site which has a few links that may help if you want to stick with the free stuff. I believe Morningstar's premium screener can screen index funds directly and then you could add additional criteria as you'd like.

Regards,
JB
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publicly posted and emailed...

Hey guys,

I just started a Coverdale account for each of my five kids for their college education. They won't need any of this money for 15-17 years, so I'm looking at equity funds.


Welcome, Boone!

Before going on, just so you know, it's Coverdell. You might hear people refer to its old names, like "Education IRA" or sometimes ESA for "Education Savings Account" but now it's named after some congressman or senator or something. A guy named Coverdell, obviously.

Each daughter has a seperate account set up through E*trade and I'd like to fund one mutual fund per account. Each would get a small monthly contribution ($100). Five funds should allow a modicum of diversity.

That's pretty creative, to achieve the diversification across the five accounts, rather than within each account. As the custodian, you have the right to reassign the funds to a different child. However, you'll have to do some fancy footwork to balance them 15 years from now, because some will surely have more money in them than others. You might contemplate an addition to your will, in case (heaven forbid) something happens to you before that time.

In the broadest strokes I was planning on the following types of funds:

1)S&P 500 index or Wilshire 5000 index
2)Russll 1000 Growth Index
3)S&P/Citigroup BMI World Ex US Index
4)S&P Midcap 400
5)? (whatever seems like a good value that adds diversity and low risk)


Numbers 1, 2, and 4 will have tremendous amounts of overlap and will not provide much diversification at all. My first suggestion is to use the Wilshire 5000 and skip all those others.

I am not familiar with #3 but I would make sure that you get an index that is somewhat selective and not burdened with stocks in risky markets. Better yet, choose a good managed fund for your international stocks. I believe this is an area where active management will really pay for itself easily.

You should have some bond exposure, period. No matter what you think about time horizons or whatever else, you are NOT diversified if you only own one asset class (i.e. equities). Perhaps the total bond market index, or else a good managed all-weather bond fund (PTTDX and its ilk).

That takes us up to three, with far more diversification than you first suggested, and pretty thorough coverage of each category. If you are intent on limiting things to only five funds, then I would choose the remaining couple of funds from a list like this:

1) A premier actively managed value fund.
2) A premier actively managed growth fund.
3) A foreign bond fund, either indexed or managed.
4) A good fund with high exposure to commodities or natural resources.
5) A good fund with high exposure to healthcare stocks.
6) A real estate (REIT) fund, either indexed or managed.

One can make arguments for or against each of these. Also, one can find funds that are weighted heavily in a given sector -- but not *entirely* in that sector -- using tools like Morningstar's portfolio analysis, etc.

I would like to compare a few index funds. Since I'm focusing on index funds, no-load, no-fee funds are my first rerequirement. Of course, low expense ratios are better; a relatively low initial investment would also be great.

I don't want to make assumptions, but your criteria seem to be based on "beginner" advice that has led you to an overly narrow range of choices. Every suggestion I made above can be achieved with no-load funds, and in most cases without transaction fees (although you've put yourself into a corner by choosing E-trade; I don't think the number of fee-free funds is as high there as other places; I haven't checked lately).

Low expense ratios don't mean a thing if the NAV declines, and this is a dirty secret that index fans don't want you to hear about. Simple index investing that worked from 1980 to 1995 is NOT guaranteed to perform the same from 2005 to 2020. If people tell you that they can project the past onto the future, they are lying. One takes a risk with every investment -- but I'd prefer paying a reasonable fee to have experts work on my holdings and reduce their volatility.

As for the low initial investment, that is made *somewhat* easier by the fact that ESAs are treated the same way as IRAs, and the minimums are lower than in taxable accounts.

ALSO: I don't know about E-trade, but at TD Waterhouse one can work out arrangements with many mutual funds to buy in even more cheaply than that. All you have to do is set up an arrangement to buy a minimal amount (say, $100) at least once per quarter or so. I was surprised to learn that fact -- I thought such arrangements were only possible when dealing *directly* with a fund company, but here's one broker at least where you can do that.

I'm having trouble comparing funds from different families. Just because the name of the fund has "Large Cap Index" doesn't mean it really follows the S&P 500 index.

The S&P500 is considered a LARGE CAP BLEND. And despite that categorization, the fact is that some stocks in that index are worth only a billion or two, which is considered small-cap. It really is a multi-cap index, and it's not really a passive index, because Standard and Poor CHANGE the stocks that go into the index every year! If one does not actually understand what goes into an index, I submit that one should not own it. But again, that is something that many index fans will not tell you.

What I would like is a list of the most common indices and the mutual funds that accurately follow them.

I believe you need to do a lot of homework before spending a dime. You do not want to get boxed in by hasty decisions based on biased advice. (And mine is just as biased as anybody else's -- but at least I admit it! <g>)

Any suggestions? MF has a series of explanations and examples

Please, oh please, do more homework than just reading the stuff here on the Fool. No offense to our hosts, but one really needs to know a lot to be able to interpret the quality of the advice here. They mean well, but that does not mean you can trust what they say blindly. The same goes for Morningstar, even though it provides scads of useful data.

Try to find a source that examines multiple choices with objective pros and cons, whether it's a book, magazine, website, or whatever. And make sure that this source is based on VERY RECENT information, because ALL investments are ultimately dependent on macroeconomics, and I personally believe that one ignores news headlines at his/her own peril.

For instance: the US recently slapped tariffs on Chinese textiles. There has been talk for ages about changes in the way the Chinese set the exchange rate of their currency (the Yuan) versus the dollar and others. One never knows if/when they might actually make such a change, but in the meantime, these other political moves will make a difference in trade. And such events will have a big impact on the entire world economy.

You may have heard that two nations in the EU (France and Holland) have voted against adopting the EU constitution. With such activity, there is the chance, probably slight but worth noting, that the Euro might be scrapped at some point and the countries would return to their own currencies. This uncertainty has made the dollar stronger versus the Euro. That makes U.S. products more expensive to sell over there. If the situation lingers, one should expect an impact in the stock market.

Recently there has been a bond rally -- along with a stock rally -- based on RUMORS that the Fed will take a break in its upward rate-raising process. If the Fed does not take that break, that could make a big difference on bonds, which could make a big difference on mortgage rates, which could make a big difference on home prices, which could make a big difference on large builders whose stocks bolster the broad market. Can you see all those dominoes falling in line?

Worse yet, the darn dominoes don't necessarily fall in a straight line, because other factors can come along, like: changes in employment rates; changes in income averages; changes in tax policy; and oh yeah --OIL prices. I mean, it just goes on and on.

So if you trust your luck to passive indexes, and only stocks, you have no choice but to go along for the ride, which is almost certain to be choppy in the next few years. That's why some actively managed funds, and broader diversification, can help you preserve capital.

I'm looking for a more complete listing so I can find fund families that I can invest in through E*trade. As of now I'm reduced to blindly stumbling across a fund with a promising name, then reading the prospectus to see how the fund invests its money.

If E-trade does not provide that kind of help you should change brokers.

If you have specific recommendations for any funds or the types of indices I've chosen, I'd appreciate the input there as well.

Well, I've given you most of that already. I absolutely do NOT suggest that you blindly follow my advice, but if you search through this board, you'll find MANY funds discussed in all these different categories. Good luck!
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