Why is there more than one S&P 500 Index Fund?

2015-12-31T12:57:10-05:00

Response by CPT Private RallyPoint Member made Dec 31 at 2015 1:08 PM

2015-12-31T13:08:57-05:00

LCDR Ben Bines Would you elaborate on the reason for everyone?

Response by MAJ Ken Landgren made Dec 31 at 2015 1:10 PM

2015-12-31T13:10:07-05:00

There are more than 50 U.S. mutual funds and exchange-traded funds that try to mimic the returns of the S&P 500—one of the most closely watched stock-market benchmarks in the world—according to Morningstar, the Chicago-based investment research firm. Together, the funds held well over $900 billion at year-end.

Yet investors who put the same amount into two different S&P 500 index funds could end up with results that vary significantly over time due to different management fees.

Response by LCDR Ben Bines made Dec 31 at 2015 1:29 PM

2015-12-31T13:29:45-05:00

Please share this question with your contacts......we'll find that the answers will more often than not be influenced by the operational landscape Financial Firms have spent so long building and protecting

Response by CDR Private RallyPoint Member made Dec 31 at 2015 1:47 PM

2015-12-31T13:47:49-05:00

One of the main reasons there are so many S&P 500 Index Funds is because every investment company wants to generate revenue and Index funds are very popular. Many investors use index funds as inexpensive way to have market diversification at a lower cost than non-index mutual funds or active trading. Plus many investors do not feel they know enough to actively trade and therefor use index funds in a passive manner.

Of note, no two index funds are the same even though they mimic the same index such as the S&P500. There are different investment strategies, the purchase slightly different amounts of each stock that comprise the index, and different ways of accounting for taxes from the sale of positions in the index and a number of other factors that can cause one index to out perform another even if they are virtually identical. This outperformance will be subtle at first but over many years you will see less of a return with higher cost index funds. One should always look at the annual cost or expense ratio of owning a index fund to make sure you are not paying to much to the investment company, while you are being shortchanged on performance or vice versa, you are paying next to nothing for poor performance.

Here is an example lets look at 4 S&P 500 index funds:
FUND Expense Ratio (%) Return CY2015 (%)
SPDR S&P 500 ETF (SPY) 0.945% 3.02%
Fidelity Spartan 500 Index Investor Shares (FUSEX) 0.095% 2.94%
Schwab S&P 500 Index Fund (SWPPX) 0.090% 2.89%
Vanguard 500 Index Fund Investor Shares (VFINX) 0.170% 2.89%
TSP C Fund 0.029% 3.08%

Of note, this is why the TSP funds are a good investment if you want index funds since in 2014 they had an expense ratio of 0.029% or 29 cents per 1000 dollars.

Response by LTC Yinon Weiss made Dec 31 at 2015 3:12 PM

2015-12-31T15:12:31-05:00

I would assume it's because every financial firm wants to offer an S&P 500 Index Fund to their clients if there is customer demand for it. It sounds similar to asking why there is more than one company selling sugar or salt, even with if there is no material differentiation.

Response by LTC John Shaw made Dec 31 at 2015 5:27 PM

2015-12-31T17:27:32-05:00

One of the benefits of capitalism in the US is it allows for competition for investments, SPX funds are core portfolio holdings and many companies offer this passive index to get money in the door. If you manage expenses well then you have a shot at getting investor money into other funds. Many people use a balance of passive and active funds to take advantage of these different philosophies of investing.

Response by LCDR Ben Bines made Jan 1 at 2016 4:14 PM

2016-01-01T16:14:08-05:00

I'll be providing the answer soon. I'd like to get a few more thoughts first, though. Keep the discussion going.

Response by CPT Private RallyPoint Member made Jan 1 at 2016 11:49 PM

2016-01-01T23:49:38-05:00

There is more than one is because each tracks different kinds of companies and looking at the overall ratings for the group is easier and much less time consuming than calculating each individually.

Response by LCDR Ben Bines made Jan 3 at 2016 2:03 PM

2016-01-03T14:03:40-05:00

Here's the Answer: There are 3 reasons, one of which was touched on in the comments:

1. Drive Revenue - You should think of banks like manufacturers. Each firm creates their set of investment products, or enters into agreements to sell competing products through a large market place. Banks engaged in this business make money a few different ways. They are paid commissions and trails by the outside firms whose products they sell, They are paid trading fees by the client, and they are paid expense ratios for their firm's proprietary funds. The question remains, though, why would an investor accept anything but the lowest cost fund? Before taxes and fees, all index funds following the same index will perform extremely close to one another. But an investors' net performance must account for the following as well: -expense ratio -trading fees -custody fees -other fees (such as advisor fees). The reason most investors don't have a good feel for the total cost of an investment is that the financial industry has designed itself to make calculating total fees incredibly difficult. To see this, try reading the disclosure statement of Vanguard's S&P500 fund, a very trusted and well regarded fund. So why wouldn't an advisor, or broker have to tell me that I could get a better priced fund and achieve better performance?

-- here is where we get into a lot of nuance

2. Investment Product Access - Every financial institution that provides investment services has either created their own products, negotiated with other institutions to provide product access, or negotiated with a 3rd party provider that has negotiated with a wide range of fund managers. The farther away from the original investment product manufacturer you get, the more "tolls" you'll pay to access their investment products. For example, Vanguard has many proprietary funds. They also provide access to a wide range of other firm funds, like Fidelity. If you read the disclosure, you'll see you'll pay higher fees to access outside or "trade away" funds. If I were an independent financial advisor and I wanted to offer my clients access to a vanguard fund, but I custody client assets with another custodian, than I'd have to access it through my custodian platform and I'd pay a "toll" for that privilege, then I'd pass that "toll" on to my client of course. If I preferred to use a Turn Key Asset Management Program (TAMP) provider, then I'd have another layer of "tolls" to pay on top of the others. So you can see that not only are there multiple versions of the same fund, but many ways an investor gets access to the same fund. The net performance of the same fund can vary greatly based on how an investor accesses the fund. In fact, the only way to avoid all these "tolls" is to go direct to the fund provider, which is functionally difficult and not very practical. Financial Institutions know that this is a complex landscape and that it's legally easy for them to hide their fee structures in confusing disclosure language. They take advantage of this knowledge and benefit by creating a "me too" investment product and simply skirt around the question of whether their version of a fund is the best.

more nuance, which I know some dislike.

Since a portfolio is generally constructed with many underlying investments, companies can point to better overall portfolio performance as a way to avoid discussing that their clients could do better on one fund or another if they were not put into advisor's/broker's proprietary funds. The best an investor could do with a fund strategy is to gain direct access to the best funds from all potential investment product manufacturers, for the same low cost as accessing a manufacturer's proprietary funds. Preventing this from happening, of course, is extremely important to the survival of the investment firm's business model. Further, many advisors working for broker dealers are incentivized to sell high profit funds and proprietary funds through increased payouts. The best an investor can hope for is to get advice from a truly independent source, and then fully understand what they are paying for access to the recommended investments. This is only the tip of the iceberg, however, as there are so many many many more intentionally structured operational limitations standing in the way of retail investors getting the service they believe they are getting.

So how is this legal?

3. Regulatory Landscape - Some providers of financial advise are simply sales people. Generally this is the broker dealer representative and they are held to a legal standard known as "suitability". They are only required to sell their client a suitable investment product, and have no responsibility to advise their clients that they could do better given a different set of funds. There are RIA's that have a fiduciary responsibility to their clients, which is definitely in the clients' favor. However, there are still many opportunities for misaligned incentives to work against the investor.

Bottom line, no professional will give you professional advice for free unless you are family or they want to date you. So knowing that, any time you hear someone explain they are doing something new and amazing and they'll do it for a well below market price, ask yourself how it's possible for them to do that and not go out of business......If they can't easily explain it, then you're probably the sheep being watched by a pack of wolves.

Response by CPT Private RallyPoint Member made Jan 3 at 2016 11:21 PM

2016-01-03T23:21:26-05:00

Have you seen this post? How do you feel about investing? Where can the average soldier turn to for help regarding this matter?What do you think about the new retirement plan scheduled to take effect in 2018?

Response by SGM David W. Carr LOM, DMSM MP SGT made Jan 3 at 2016 11:55 PM

2016-01-03T23:55:35-05:00

The difference is the expense charges, how often they have to buy and sell stocks and size of the actual companies index fund

Response by CW3 Private RallyPoint Member made Jan 12 at 2016 8:23 PM

2016-01-12T20:23:43-05:00

Different firms make their own indexing funds, they mimic the S&P (Standard and Poor) 500 in holdings. It tracks 500 larger companies based off of the Dow Jones indications. They indexes don't normally follow the holdings percent exactly and they may take a day or so to match the holdings when they change.