Buy These Enhanced Index Funds For A Semi-Active Approach

Passive funds have dominated inflows over the past decade, including 2014. However, active management is still favored by many investors and financial houses such as Fidelity vie for them. For investors caught in a dilemma between which to choose, Enhanced Index Funds (EIF) is the best solution.

Enhanced Index Funds, like index funds track stock market indexes, however, they mix a semi-active approach to portfolio management as there are certain modifications made to beat the return of tracking indexes. They mix the best of both passive and actively managed funds. By using enhancement strategies, including the use of leverage and derivatives, exclusion of certain securities, timing the market, Enhanced Index Funds aim to be more profitable than regular index funds.

Enhanced Index Funds versus Index Funds

Except for the "index fund" title, there are not many similarities between an Enhanced Index Fund and an Index fund. The saying “don’t judge a book by its cover” is key here, as investors may be misled by the title “index fund” in what is actually an Enhanced Index Fund.

Index funds have lower fees and lower turnover ratios. Portfolio turnover is the measure of how often a fund buys and sells assets. Index funds carry low turnover ratios. This is because buying and selling is only needed when there is a change in the underlying index. This, and the fact that there is no active management, reduces the fees or expense ratios for Index funds.

However for Enhanced Index funds, it is not only about tracking an index but also requires semi-active management. Also, as these funds do not duplicate index holdings, the turnover ratio may also be higher than Index funds. High turnover ratio also leads to higher capital tax gains.

Meanwhile, Enhanced Index Funds may offer more diversity than Index funds. Index funds may replicate an index focused on some core group, say for example value stocks or particular sectors like technology or finance.

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