Bond Index Funds-a Synopsis                          Page 6

Advantages of Bond Index Funds Over Actively Managed Bond Funds

Although John Bogle can personally claim credit for getting index funds off the ground, it is their evident benefits to customers that are responsible for the ongoing success of bond index funds.

Consistent Performance

Bond index funds offer numerous advantages over actively traded bond funds. Most important is their consistently superior performance. Between 1988 and 1998 Bond index funds returned 8.9% annually vs. 8.2% for actively managed bond funds, according to Morningstar. And during that time bond index funds outperformed 85% of bond funds. Vanguard's Total Bond Market Index typifies a solid bond index fund. It's current 7% 5-year average beats 87% of funds in the intermediate maturity range even though it carries a 3.8% standard deviation risk, as opposed to the 4% risk of the average fund (Dow Jones Newswire 4/4/00). Although it's true that Vanguard's bond index funds boast some of the best returns, other bond index funds, such as those offered by Charles Schwab and Fidelity, are also quite competitive.

Index Funds Enjoy Lower Operating Expenses

To a great degree, these superior returns are the result of the significantly lower expenses that bond index funds incur. Especially when bond yields are low, operating expenses represent a high percentage of any bond fund's return. Currently, the average actively-managed bond fund charges 1.1% of fund assets-a full 20% of the projected return-for management fees and other expenses. The average bond index fund charges less than half that, or 0.45%. Vanguard Group, the leader in bond index funds, charges 0.2% for its Total Bond Market Portfolio Index fund. (Investment News, 1/25/99, p.24 ff.)

Bond index funds, like their counterparts in equities, have little need for research departments; computers perform a much larger proportion of the funds' analytical work. And actively-managed bond funds almost always trade more. Consequently they incur a variety of extra expenses such as greater brokerage fees and greater capital gains tax payouts. In addition, actively-managed funds tend to keep some assets in low-yielding money market funds to cover investor redemptions.
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