Is owning index funds a good idea? It depends on the index, according to personal finance expert John Waggoner (“Funds following odd index? Just say no”). Broad based index funds are a good idea, but new exotic niche funds are not.
Niche funds are becoming narrower and riskier. The problems associated niche funds include overconcentration, high fees, illiquidity, lack of transparency, high premiums or discounts relative to net asset value, and tax inefficiency. They are unsuitable for many investors.
An broad based index fund such as the Vanguard S&P 500 Stock Index fund has many virtues. They include: low cost (attributable lower management fees), low taxes (attributable to less trading), and no manager risk (management is limited to tracking the index).
Niche funds, on the other hand, are often concentrated bundles of thinly traded assets. While they can function as a hedge against certain risks and enhance a diversification of a portfolio in small doses, too often they are sold and used for speculation rather than diversification.
Narrowly focused index funds are a growing trend, but it would be a bad idea to invest in them, according to Mr. Waggoner.
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.