| Load-Adjusted | Unadjusted |
Index Fund Report |
S&P 500® Index Funds Analysis
Quarterly Report - October, 2007 Edition
Which Index Funds offer the best returns over the long run?
This analysis compared the performance of all the 529 Funds that state their primary objective is to match the S&P 500® and that have had at least 3 years worth of performance data available. These funds were then rated by best overall performance for an investor during the three-year period ending September 30, 2007.
Note: These rankings strictly measure the performance of the funds and do not include or reflect any favorable state-tax treatment or benefits for the specific plans. Also note, some of these plans may only be available to in-state investors.
| Rank | State | |
|---|---|---|
| 1 | Ohio | |
| 2 | Utah | |
| 3 | Nevada | |
| 4 | Nevada | |
| 5 | Texas | |
| 7 | District of Columbia | |
| 6 | New Jersey | |
| 8 | Nebraska | |
| 9 | New Jersey | |
While many State Plans offer ostensibly the same fund, their load and expense fees vary significantly, and over time, greatly impact the Funds' performance (see below).
In this analysis, we will examine S&P 500® Index funds in 529 plans that have at least three years of data. We will identify which funds (and the Plans that manage them) have generated the best returns for their investors and demonstrate the effects of higher costs and sales loads using an illustrative hypothetical family’s college savings.
These funds use investments from Vanguard, Franklin Templeton, State Farm, Calvert Asset Management, and SSgA.
The S&P 500® Index had a 1 year return of 16.44% and a three year annualized return of 13.14% for the quarter ending September, 2007. The Non-529 Vanguard S&P 500 Index Fund had a 1 year return of 16.31% and an annualized 3 year return of 13.00%.
The table below details the performance data for the funds in our report. Raw one and three year data is presented along with the sales load adjusted returns for funds with loads.
| State | 1-yr | 3-y | 1-yr (after load) | 3-yr (after load) | Plan/Fund Expenses |
|
|---|---|---|---|---|---|---|
| Ohio | 16.21% | 12.83% | no load | no load | .23% | |
| Utah | 16.01% | 12.71% | no load | no load | .275% | |
| Nevada | 15.83% | 12.49% | no load | no load | .50% | |
| Nevada | 15.66% | 12.45% | no load | no load | .65% | |
| Texas | 15.82% | 12.47% | 14.15% | 9.21% | .73% | |
| District of Columbia | 15.94% | 12.62% | 10.48% | 10.83% | .50% | |
| New Jersey | 15.49% | 12.26% | no load | no load | .85% | |
| Nebraska | 15.57% | 12.31% | 9.78% | 10.40% | .80% | |
| New Jersey | 15.25% | 11.99% | 8.64% | 9.80% | 1.10% |
From a raw performance return perspective, even though each of these funds requires little active management or investment decisions, the performance ranges from 11.99% to 12.83% over the three year annualized return. Using actual return numbers (after sales loads), the range is from 9.21% to 12.83%
Suppose a family initially invests $1,000 when their child is born and gets the current 1-year Buy-In return rate. Further assume that the money grows at the 3-year raw return rate until the child is 18. This table shows the amount the family will have at the time the child turns 18.
| State | Start | 1st Year Return% | Over next 17 years | Final Amount |
|
|---|---|---|---|---|---|
| Ohio | $1,000 | 16.21% | 12.83% | $9,046 | |
| Utah | $1,000 | 16.01% | 12.71% | $8,869 | |
| Nevada | $1,000 | 15.83% | 12.49% | $8,566 | |
| Nevada | $1,000 | 15.66% | 12.45% | $8,501 | |
| Texas | $1,000 | 14.15% | 12.47% | $8,416 | |
| District of Columbia | $1,000 | 10.48% | 12.62% | $8,332 | |
| New Jersey | $1,000 | 15.49% | 12.26% | $8,248 | |
| Nebraska | $1,000 | 9.78% | 12.31% | $7,900 | |
| New Jersey | $1,000 | 8.64% | 11.99% | $7,448 |
The best performing fund will have gained $1,598 more than the worst performing fund. This is a 21.46% difference! What is causing this significant difference in returns of the different funds?
The potential sources of the difference in fund returns can be summarized below:
- The definition and management of a funds composition - As these are index funds, they require very little overhead on the management of the funds composition. Most of the churn or changes occur when the index itself adds or removes stocks.
- Effects of expenses such as higher underlying fees, sales loads and plan management charges – The higher the fees and sales charges for the fund/plan, the less likely the fund will perform better than a similar fund with lower fees.
- Efficiency of the Plan in managing new investments and churn - This affects the funds ability to be fully invested in the underlying stocks vs. having to keep cash on hand for redemptions or transfers.
In this analysis, we find the effects of the combination of sales expenses and 529 Plan operating costs are the major contributors to the performance differences of the funds.
NOTE: The relative performance difference is unlikely to change significantly between the funds unless the fees/sales load change for a fund.