Things to Remember if Buying an Index Fund

Thinking of buying an index fund? Some tips:

* Lipper Analytical tracks 135 index funds in all, but most index money is in the 48 funds that mimic the Standard & Poor’s 500 stock index.

* Because the S&P; is a market-value-weighted index, the stocks with the highest market value--share price times shares outstanding--dominate the index, and thus the funds. In other words, you don’t own the 500 S&P; stocks equally. The 25 biggest stocks, such as General Electric, Coca-Cola and Exxon, alone account for nearly a third of the index, and the funds.

* S&P; 500 funds are not all equal. Although they buy the same big stocks in the same proportion, the funds’ internal costs vary. As the chart shows, the Vanguard Index 500 fund has an expense ratio of 0.2%, meaning that is the slice of assets taken to pay for fund operations each year. In contrast, the Stagecoach Corporate Stock fund, another S&P; fund, had a ’95 expense ratio of 0.96%.

Expenses account almost entirely for the shortfall in the S&P; funds’ returns versus the index itself, which rose 37.53% last year, with dividends. So to get the best return it makes sense to own a lower-cost fund.

* The $23-billion asset Vanguard Index 500 fund ([800] 662-7447) has become the behemoth of index funds because of its low expenses and because Vanguard has become synonymous with indexing.

* If you want to buy a broader U.S. index than the S&P;, the Vanguard Total Stock Market fund attempts to replicate the Wilshire index of 5,000 U.S. stocks. Although the Wilshire’s return tends to closely track the S&P;’s (both are dominated by the same big stocks), the Wilshire will perform better when smaller stocks are surging and worse when they are plunging.

Another broad market index fund is the Schwab 1,000 fund ([800] 526-8600), which buys the 1,000 largest U.S. stocks. But it, too, just closely tracks the S&P.;

* If you want to index particular market niches, Vanguard offers the most choices, with 17 index funds in all, including foreign stock funds.

Vanguard, Schwab, Benchmark ([800] 595-9111), Dreyfus ([800] 645-6561), Galaxy ([800] 628-0414) and Gateway ([800] 354-6339) have funds that track small or mid-sized stock indexes. Finally, Dimensional Fund Advisors offers numerous index funds, but only through financial planners. (See story on D4.)

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An S&P; Index Sampler

Funds that attempt to mimic the Standard & Poor’s 500 index return achieve differing results, based almost totally on the expense of running the portfolio. Expense ratios as a percentage of assets, and 1995 returns, for six S&P; funds:

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Fund 1995 expense ratio 1995 return Vanguard Index 500 0.20% 37.45% SEI Index 500 0.25% 37.35% T. Rowe Price Index 0.45% 37.16% Fidelity Market Index 0.45% 37.00% Dreyfus S&P; 500 0.55% 36.72% Stagecoach Corp. Stock 0.96% 35.99%

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Source: Morningstar Inc., funds listed