Each index fund’s prospectus explains its approach to selecting investments,
as well as providing its expense ratio, historical returns, risk profile, and other fund information. Most index funds are full replication funds. That means they buy all of the securities in the funds they track. Others are sample-based. Providers of these funds may use complex mathematical models to identify securities from among those in the index or look for price inconsistencies on which they can capitalize. An enhanced index fund chooses selectively from a particular index portfolio in order to produce a slightly higher return. The goal is to narrowly beat the index by anywhere from a fraction of a percent to two percent-
age points but not more, since a wider spread would classify the enhanced fund as an actively managed mutual fund rather than an index fund. Enhanced index fund managers may achieve higher returns by identifying
the undervalued stocks in the index, adjusting the holdings to include a larger proportion of securities in higher- performing sectors, or using other investment strategies, such as buying derivatives or using leverage. While enhanced index funds may expose you to the risk of greater losses than their plain-vanilla counterparts, they may also offer an   Read more…