Across My Desk: Index Funds

While it's true that the first half of '06 provided investors with some whopping returns, index funds topped most.

The top-performing fund for the first six months of 2006 was the US Global Gold Shares Fund, up a very healthy 44.77 percent, according to Lipper. The worst, Ameritor Investment, down a can-you-believe-it 96.05 percent. Somewhere in between, however, are the averages and the indices---the latter often hard to outperform.

Lipper's numbers show the average domestic equity fund up 3.05 percent for the first six months of this year and S&P 500 index funds ahead 8.07 percent--and that's where things get interesting.

According to Standard & Poor's research, the S&P 500 outperformed 58.2 percent of the large-cap funds that that research company tracks; the S&P MidCap 600 outperformed 61.3% of mid-cap funds; and the S&P SmallCap 600 outperformed 68.1% of small-cap funds.

Looking back you'll find actively managed mutual funds have underperformed their relative Standard & Poor's benchmark in 8 of 11 general domestic equity styles during the first half of 2006. Over the past three years, the S&P 500 has beaten 64.9% of large-cap funds, the S&P MidCap 400 has outperformed 80.5% of mid-cap funds, and the S&P SmallCap 600 has outperformed 80.2% of small-cap funds.

"Active managers are having a difficult time in this year's volatile market," says Rosanne Pane, Mutual Fund Strategist at Standard & Poor's. That said, funds that have maintained overweight positions in sectors like natural resources, energy, telecommunication services, and REITs have performed well and have led returns, she added.

Bottom line: Don't overlook index funds--while not particularly sexy their records can be impressive.