Many investment pros favor index funds, saying that actively-managed funds suffer from high fees, high transaction costs, and poor investment selections. Index funds deliver the broad market at low costs.
However, index funds may have their own flaws. Most indexes are weighted by market capitalization (total shares multiplied by their price), which means that overvalued companies are over-weighted and undervalued companies are under-weighted. For example, more than half of the companies in the S&P 500 index were replaced in 2000 with technology and communications stocks. When the bubble burst, S&P index funds came crashing down.
As an alternative, a new PIMCO Fundamental Index Plus Fund will track the 1,000 largest public U.S. companies. Instead of weighting stocks according to market capitalization, it will base its weightings on a combination of factors such as sales, cash flow, book values, and dividends. This index is designed to allow investors buy into a broad measure of U.S. industry, without a tilt towards currently-hot stocks.
