Hi Diehards:
Enhanced Index Funds are designed to closely track market indexes, and by using active management, outperform the indexes. They appeal to investors trying to "beat the market" with minimum risk. However, in addition to the "market" risk of index funds, these funds also incur "manager" risk. They also suffer from the increased costs of higher turnover and higher expense ratios.
Today's Wall Street Journal has a front page article about several Enhanced Bond Index Funds offered by State Street Corp., one of the world's largest index fund providers. Here are excerpts:
"Customers are fuming about losses they have suffered in State Street (enhanced) bond funds that are designed not only to track but also just beat the indexes. Customers believed they were low-risk vehicles. Instead the funds made aggresive bets on mortgage-backed securities, derivatives and other investment exotica."
"Earlier this week, a unit of insurer Prudential Financial Inc. sued State Street over $80 million in losses that 165 retirement plans it manages suffered in State Street fixed income funds."
"Investors appear to be dumping the enhanced-index funds. Assets in the company's five bond mutual funds are down 43% so far this year."
"The bond fund (Government /Credit Bond Fund) dropped in value by 12% in July and August)"
Note: ALL of Vanguard's taxable bond funds (except High Yield's -3.3% decline in July) had a gain in July and August.
"In Alaska, the bond fund was popular with employees in their 50s who were nearing retirement, and who wanted conservative investments that were a little better than a money maket fund, says Mr. Burnett. The recent loss, he says 'may delay retirement for some people, that's what we are talking about .'"
"The states' and Prudential's losses show that individual investors may be facing hidden risks from the subprime and credit mess in their retirement accounts, and also highlights the proliferation and potential pitfalls of the unregistered and often opaque investment vehicles in some employee plans."
It is reassuring to know our investments are with Vanguard.
Best wishes.
Taylor
