In Case This Good Thing Comes to an End...
NEW YORK — For investors eager to buy index funds, experts suggest some strategies to help protect against market declines:
* A "super" or "enhanced" index fund. They use special strategies to protect or add share value. Morningstar tracks some 38 "super" index funds, which employ hedging strategies to both protect market value and add from one to two percentage points a year.
But expenses are higher than non-managed index funds, and these funds tend to be new. So few have been tested in a market downturn.
* Index funds not linked to the S&P 500. Fidelity (800-544-8888), for example, offers a new fund linked to the Wilshire 5000 stock index, the broadest market index and one that includes stocks of many smaller and mid-sized companies as well as the blue chips found in the Fortune 500.
Some specialty funds are linked to indexes measuring utilities, gold, and real estate.
But these other indexes could fare no better than the S&P 500 in a downturn. In fact, some technology and small cap indexes have struggled in recent years. Natural resources and precious metals stocks, moreover, are notoriously volatile.
* Non-US-linked index funds. Buying overseas securities to protect against market uncertainty or declines is a textbook approach to diversification.
In the 1980s and '90s, when the US markets fell, some global markets did not.
* Funds of Funds. These are mutual funds that own the shares of other index mutual funds, perhaps the "most diversified type of index fund," says Russel Kinnel, head of equity research for Morningstar.
Vanguard (800-662-7447), offers a series of three, called LifeStrategy Funds. They buy into other Vanguard index funds - both bonds and foreign and domestic stocks. But all components are indexed, Mr. Kinnel notes.
"For a young investor who wants to get into an index fund, this type of fund can be especially valuable," he says, because it provides instant diversification against market dips.