Mutual Fund Site

A few days ago, we wrote about how Index Funds are not the easy solution that many mutual fund investors would like them to be. In fact, there are about as many different categories of index funds are there are other specialty asset classes, which actually makes choosing the right index fund about as easy as finding the right bond fund to invest in. No easy task.

One of the index funds that caught our eye when reviewing some of these unique and individual funds was the Dreyfus MidCap Index Fund (PESPX). A few key characteristics caught our attention with this fund, not the least of which was that it is a solid 4-star earner according to Morningstar.com. With average risk and above average returns, this Index Funds will actually outperform the category and index on a regular basis. Granted, it does not consistently outperform, but it will do so on a fairly regular basis. So what sets this index fund apart from some of the others?

Asset mix. Here at the mutual fund site, we like to see that this is a fund that invests in mid-cap securities. Of course, with the index in question being the S&P MidCap 400, which covers roughly 7% of the equity market. Yes, a very unique segment, which is primarily made of up financial firms (which is the largest weighting in the index as well).

Perhaps one of the reasons this fund has performed so well, particularly since 2006 when it outperformed both the S&P 500 index as well as other index funds in its category is that mid-cap financial services firms are such a heavy weighting. We continue to believe that financial firms in the small- to mid-cap segment will outperform their large cap counterparts as the domestic economy starts to recover, something that this index fund will also be able to use to its advantage. In fact, we can expect to find a growing number of posts in our “Financial Funds” section over the next month or two.

But as is the case with all index funds, investors are stuck with the bad as well as the good. This means there is still some exposure to the energy segment (mid-cap, remember) that many actively managed mid-cap growth funds will have opted to ignore completely. It also means a fairly aggressive position in the Industrial Materials space, which we also think could weight the fund down (along with those financials) if the economic recovery does not start taking hold sometime soon.

One area that should set prospective buyers at peace is this index fund’s Price to Future Earnings ratio. While it may be seen as a little on the optimistic side right now, weighing in at roughly 15:1, it is actually pretty close to where the average sits. And while many might consider this high compared to some of the value funds available, 15:1 remains fairly conservative compared to top performing, actively managed mid-cap growth fund like the RBC Mid Cap Growth Fund, which shows Price to Future Earnings of roughly 19:1 (and returns of over 7% on a YTD basis) and the Morgan Stanley Mid Cap Growth Fund that has Price to Prospective Earnings of closer to 23:1 and YTD returns of nearly 9%. This of course begs the question: Index fund or actively managed growth fund?

Overall, though, the Dreyfus MidCap Index Fund remains one of the more attractive index funds for this category. It is a solid performer and one that appears to have all of the required holdings for substantial returns once the economy takes holds and starts running again. Although this may not be one of those years that the S&P MidCap 400 outperforms all other indices, it provides investors with a steady and fairly safe exposure to all of the required asset classes. But for investors who are more interested in straightforward growth funds, then maybe index funds should not be on the shopping list at all.