Bond Index Funds-a Synopsis                          Page 9

* Lower Commissions in Most Cases When an investor buys individual bonds through a broker, he pays a commission that's usually hidden; the quoted bond price includes a substantial commission. The smaller the investment, the greater the commission. On a $1000 bond the commission can be 5%. Sometimes the hidden costs for these bonds appear quite cryptic. Jason Zweig of Money Magazine said, "if you have $100k you're better off buying a bond fund than individual bonds because most bond brokers take an 'invisible spread' which lowers yield." He doesn't elaborate on how this 'invisible spread' works, but given Mr. Zweig's formidable reputation, one should suspect that he's referring to something substantial.

* Daily Liquidity Investors may buy and sell shares in a bond index fund on any business day. And the market for shares in many bond index funds is highly liquid. Also, most bond index funds offer options such as check writing and telephone redemption to make bond investing more convenient.

* Bond index funds Outperform Inflation-indexed Bonds in a Low-inflation Environment According to Morningstar, when inflation is low the principal of the inflation-indexed bond would remain the same and the yield would decrease. Simultaneously the net asset value (NAV) of the bond index fund would increase, but the yield would decrease. This scenario favors bond index funds.

Disadvantages of Bond Index Funds vs. Actively Managed Bond Funds: Could Retard Great Talent

Some feel that there are a number of disadvantages to the indexing of bond funds, among them the preclusion of great fund management talent. The career of William Gross of Pimco Funds is proof that excellence in bond fund management is not necessarily tied to indexing. Mr. Gross and his staff manage about $180 billion in bond assets and more than $40 billion in mutual funds, "about 5% of the assets in such funds," according to the Wall Street Journal (12/28/99). Pimco's Total Return Fund, the nation's largest bond mutual fund, has returned 9% annually over the last decade, putting it in the top 5% of its peer group. In 1999 the bond funds managed by Mr. Gross have brought in more than eight billion dollars in net new money, which is about half the new money that has come into bond funds this year. Clearly any system of investing that allows this sort of talent to lie idle is probably a system that does not have excellence as its goal.
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