Is the index the right finger to be pointing?
For investors tired of watching mutual fund managers make lousy decisions and underperform the market, mutual fund families invented the index fund. The manager of the index fund buys and holds the stocks in the market index. Index funds return exactly what the market returns. Index funds have become extremely popular in the last decade.
As index funds increase in popularity, many non-index funds also imitate the indexes. Increasingly, more and more funds buy the same stocks, have exorbitant marketing expenses, and have the same goal: increasing funds under management. Stock selection is motivated by this goal. A fund full of unknown stocks will not be recommended by financial planners or understood by the public. Unusual funds are quickly labeled “too risky” and disappear.
Mutual fund families comb through the stock picks of each fund and assure that a minimum number of the popular index stocks are present. Managers who vary too far are reprimanded and eventually fired if they do not conform.