Not All Indexed Portfolios Are Equal

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Elton, Gruber and Busse compared the returns and expenses of various portfolios indexed to the S&P 500. They found the difference between the best-performing and worst performing S&P 500 fund was 2.09% annually from 1996 through 2001. The differences in return were the result of both the fee structure and other factors such as securities lending practices.

This difference is important, as investors in an indexed portfolio expect to receive approximately the return on the index each year. To the extent that there are substantial variances among indexed portfolios the purported tracking risk reduction relative to actively managed portfolios is lost.