Make sure your mutual fund is tracking its index
This great entry from My Money Blog takes a hard look at the Fidelity U.S. Bond Index Fund (FBIDX).
When the author began reading Morningstar’s FBIDX Analyst Report, he was surprised to learn that his investment had not been tracking its index.
“Although this fund was designed to track the Barclays Capital U.S. Aggregate Bond Index, it lagged that bogy by more than 3 percentage points from mid-2007 through the end of 2008.
“Lagging a benchmark by 3 full percentage points is a lot in the index world. Passive investors want low costs and low tracking error from the target benchmark!
“It turns out that Fidelity had been making “modest” bets outside of the index in order to juice their returns, including minor exposure to subprime mortgages through an “ultra-short” bond portfolio*. FBIDX costs more than VBMFX by about 0.12% a year, so they would always lag if all other things were equal, and needed to take such additional risks in order to have better performance numbers.”
It’s hard to stay diligent when your investments are designed to track benchmarks that aren’t as widely visible as the DJIA or the S&P 500.
“So where’s a good place for those of us who don’t want to pay $200/year for Morningstar to find out that our bond funds may not be matching their index?”, asks a commenter.
LikeAssets is the perfect place for those wondering the same thing. It’s free to sign up, and uses the proper benchmark for every security, so it’s easy to tell if an index fund is missing its mark.
Read the article at My Money Blog »
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