As a growing number of retail investors put their money into S&P 500 index funds, a Standard & Poor's research group has examined 156 such funds and named the four lowest-cost performers in terms of expense ratios and total return.
S&P's picks for the best four S&P 500 index funds, in alphabetical order, are the DWS Equity 500 Index Fund-S (BTIEX), the Schwab S&P 500 Index Fund (SWPPX), the T. Rowe Price Equity Index 500 Fund (PREIX) and the Vanguard 500 Index Investor (VFINX).
In making its top picks, S&P considered only retail share classes and excluded funds that are closed to new investors or that require a minimum initial investment of more than $5,000. The four funds each have S&P five-star rankings and three-star Morningstar rankings.
Cost was one of the major contributing factors S&P identified as driving performance disparity among the universe of index funds it reviewed, said Dylan Cathers, an S&P mutual fund analyst who performed some of the S&P 500 index fund research.
"The spread between the highest and the lowest of expense ratios was frankly more than I expected it to be," Cathers said. While he acknowledged that there were different ways to invest in the S&P 500 index—for example, some funds included a mix of cash and derivatives while others were in top-earning holdings—"paying well over a 1.0% expense ratio is extremely high," he said.
"It's very important for investors to take a step back and see what they are actually being charged and the method they are using to select their funds," Cathers said.
In its research, published as a "Trends & Ideas" comment in the Standard & Poor's MarketScope Advisor on Jan. 31, S&P found a wide disparity in performance among the 156 funds totaling more than $300 billion in assets under management as of Jan. 27. Of the 144 funds in existence for five years, six had a total return of more than 2.4%, while 14 had a return of less than 1.2%.
The S&P 500 index saw a five-year annualized return, excluding dividends, of 0.25% between Jan. 27, 2006, and Jan. 27, 2011. The top fund during that period was S&P five-star ranked DFA US Large Company Portfolio (DFUSX) had a total return of 2.49%. In contrast, two-star ranked BB&T Equity Index Fund (BCEQX) had a five-year return of 0.96%, the lowest five-year annualized gain for that period.
The disparity in expense ratios was just as wide as the difference in returns. The average of the 20 mutual funds with the lowest expense ratios was 0.18%. Conversely, the average of the 20 funds with the highest expense ratios was 1.35%. The lowest expense ratios were populated by institutional funds. After removing institutional funds, there was little difference, with the 20 lowest-expense-ratio funds averaging 0.24%.
