Investors have put billions of dollars into vehicles that seek to track the S&P 500 index and logic would dictate that one S&P 500 index fund would be just like the next S&P 500 index fund. Logic would be wrong.

After screening for mutual funds that seek to track the S&P 500 index, S&P Equity Research found wide variances in the performance, costs, and risks of S&P 500 index funds. The S&P 500 index funds in S&P's mutual fund coverage universe have ranks covering the spectrum between five stars (18.8% of the 81 mutual funds in the S&P 500 Index Objective peer group) and one star (3.7%). The largest percentage of funds (45.7%) carried a three-star rank.

S&P mutual fund rankings are based, in part, on the prospects for the underlying holdings, and a fund is ranked positively, compared to similar funds, if it owns stocks that are deemed as undervalued based on S&P STARS and if they are high quality according to other Standard & Poor's proprietary analytical measures. But these inputs are of limited differentiating value when analyzing S&P 500 index mutual funds.

Over the past one- and three-year periods, the performance of the funds has varied more than one might expect. For the 12 months ended September 30, 2009, the top fund in the group, based on price change, declined 6.1%, while the worst performer dropped 9.3%. Meanwhile, the S&P 500 index actually dropped 9.4% over the same period. In contrast, the return of the SPDR S&P 500 ETF (SPY $105)) declined 6.9% over the same one-year period. SPY is ranked as overweight by S&P using a holdings-based methodology that is largely consistent with S&P's mutual fund approach. ETFs, which have become more popular in recent years, offer the benefit of low costs. Details on S&P Equity Research's ranking and commentary on SPY and other mutual funds and ETFs can be found on MarketScope Advisor®.

Among the highest ranked mutual funds in the group, we highlight three five-star funds: United Association S&P 500 Index Fund; II (UAIIX $7.80), Schwab S&P 500 Index Fund; Select (SWPPX $16.75), and Fidelity Spartan 500 Index Fund; Investor (FSMKX $74.25). All three funds outperformed peers over the trailing one-, three-, and five-year periods and did so incurring a comparable amount of volatility as measured by standard deviation, with expense ratios in line with or below the larger group. Neither UAIIX nor FSMKX has a sales load, but SWPPX has a redemption fee of 2%.

"As we continued to analyze our screen's results, we come across the most telling statistic - net expense ratio. Here, the range was extremely wide, especially when one considers that the funds' objectives are all the same - track the S&P 500 Index," said Dylan Cathers, an S&P Equity Analyst who helped develop S&P's new mutual fund ranking methodology. "The most expensive fund our screener found had an expense ratio of nearly 2.3%. That contrasts with the least expensive fund, which had a ratio of under 0.1%. When we break down these statistics further, we see that the average expense ratio for the four- and five-star funds was roughly 0.3%. In comparison, the net expense ratio for the SPDR S&P 500 ETF was slightly below 0.1%. In sharp contrast, the 17 two-star funds in our screen had an average of nearly 1.3%."

After looking more closely at the three one-star funds, we note that the all of them have trading histories of less than three years, for which they are penalized in our ranking methodology. (For details on the S&P Mutual Fund Methodology and nearly 20,000 reports.Also contributing to the low rank of these one-star funds, however, was their considerably above average expenses, which led to a negative cost factor score for each. Specifically, S&P 500 Capital Appreciation Fund; A (SSPAX $11.24) has a sales load of 5%, Wells Fargo Advantage Index Fund; A (WINAX) has a sales load of 5.75%, and Wells Fargo Advantage Index Fund; B (WINBX $38.99) had gross and net current expense ratios that were double the fund's peer averages.

"Given the differences between funds that have the same objective, mimic the performance of the S&P 500 index, we believe it is vital for investors to fully understand not just the relative performance of the funds they are investing in, but the risks and costs associated with those funds as well," Cathers said. "We note that investing in an ETF is certainly a valid alternative, as evidenced by SSPAX's investment philosophy - it has 100% of its assets in SPDR Trust; Series 1." The inclusion of costs make matching the performance of the index a challenge.

Standard & Poor's equity research, mutual fund, exchange-traded fund and bond research can be found on MarketScope® Advisor. More information on Standard & Poor's MarketScope Advisor is available by calling 1-877-219-1247. MarketScope Advisor is part of the Standard & Poor's Equity Research Services family of products. MarketScope Advisor provides financial advisors with actionable investment intelligence on multiple asset classes including stocks, ETFs, mutual funds, variable annuities, fixed income and workflow tools that enable advisors to stay connected to the market and their investments.

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