Pure Evil: Non-Traditional Index Funds

Economists have long preached the benefits of index funds such as S&P 500 index funds. These funds have low fees, low tax liability and are very well diversified.

But according to the WSJ$

" Investors are embracing a slew of new specialized funds that have exploded the idea of what an index fund is meant to track. Fund companies, aiming to differentiate their offerings and levy higher fees, are slicing and dicing the market in various new ways. Many of these "alternative" index funds are less than a year old and have yet to establish a meaningful track record."

"Many financial advisers and industry experts fear that the alternative index funds sacrifice many of the traditional benefits of indexing, including low cost, broad diversification and simplicity. Experts also see risks to investors in many of the new funds that track narrow, volatile market segments, such as commodities and currencies."

My fear is that a former student of mine will remember that I talked about how great index funds were and then invest in one of these non-traditional index funds. Now when economists explain the benefit of index funds we will have to be careful to explain that some things advertised as index funds should be avoided.

Ideally, the term "index fund" would be copyrighted by economists and we would only let proper index funds use the label.