NEW YORK (CNNfn) - Online brokerage E*Trade will have its hands full trying to compete with Vanguard's mighty S&P 500 Index Fund, which has such a good record it even beat the blue-chip benchmark in 1998, a fund analyst said Tuesday.
E*Trade last week announced plans to enter the asset-management business with its own mutual funds and money-market funds.
The E*Trade S&P 500 Index Fund, available only through e-trading, is a no-load fund requiring a minimum investment of $1,000.
"Indexing is a little more complicated than people think," said Scott Cooley, an equity fund analyst at Chicago fund-tracker Morningstar Inc. "It's pretty hard to bet against Vanguard."
Indeed, many mutual fund groups have S&P index funds, including Fidelity, Schwab, Dreyfus, Invesco, and USAA, among others. Many institutional investors also index the S&P 500, including Banker's Trust. Banker's Trust has so much money indexed that Fidelity hires the bank to run its own index fund, Cooley said.
But not all index funds are alike. The fees can vary widely -- and some funds try to sweeten performance by buying futures contracts on the stocks in the index, he said. A futures contract is when you agree to buy a stock at a set price at a future date.
Vanguard, with $79 billion in assets, earned 28.62 percent in 1998, beating the S&P 500 by 0.04 percent, according to Morningstar. The fund is ranked five out of five stars for risk-adjusted returns. The fund is up 0.99 percent this year as of Feb. 19, which is 0.15 percent behind the benchmark index.
Vanguard's fees are low at 0.19 percent a year, Cooley said. By contrast, Dreyfus has an index fund that charges 0.50 percent.
Something else that sets Vanguard apart, is that it has done detailed tax simulations to track what would happen if a lot of money flowed out of the fund, to make sure the fund doesn't have to make a big capital gains pay-out at the end of the year.
Efforts to reach E*Trade for comment Tuesday were unsuccessful. But according to information on the brokerage's Web site, the fee is 0.32 percent.
Vanguard, meanwhile, has also been busy in other parts of the fund universe. The Valley Forge, Pa., fund company this week introduced the Tax-Managed Small-Cap Fund, a no-load fund that will invest in small companies in S&P's Small Cap 600 Index. The fund aims to minimize portfolio turnover and capital gains hits.
The new Vanguard fund has a minimum investment of $10,000 and an annual fee of 0.20 percent.
-- by staff writer Martine Costello