Is this an index fund?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
grizzoola
Posts: 33
Joined: Mon Oct 10, 2011 5:48 pm

Is this an index fund?

Post by grizzoola » Sat Apr 18, 2015 11:36 am

A financial advisor told my friend about what he called an index fund. These funds, as I understand, "index" your buy-in, so that if the price falls below your buy-in, your buy-in doesn't go down with it. IOW, the buy-in is a base. If the price increases, your base is established at the higher price & will not fall below that. This is how I understand these funds work.

I never heard of this practice. I explained to my friend that an index fund follows an index, etc., etc. This may be an index fund, but the practice of establishing the base does not make it an index fund. The only indexing is in the rise and fall of fund value in relation to the investor's buy-in. Hope someone can help w/ this.

User avatar
BolderBoy
Posts: 3299
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Is this an index fund?

Post by BolderBoy » Sat Apr 18, 2015 11:38 am

Answer to the "subject line" of your post = "No."

toto238
Posts: 1877
Joined: Wed Feb 05, 2014 2:39 am

Re: Is this an index fund?

Post by toto238 » Sat Apr 18, 2015 11:38 am

Sounds like an insurance product to me. Indexed-annuities can make the salesperson a very nice commission.

User avatar
LadyGeek
Site Admin
Posts: 40516
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Is this an index fund?

Post by LadyGeek » Sat Apr 18, 2015 11:51 am

Can you get the name of this "index fund"?

I'm concerned that it may indeed be an insurance product, there are a LOT of them. For example: Equity-indexed annuity

Point your friend to this forum (without disclosing your username) and show him the wiki: Getting started We'll be glad to help him out - for free.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

cfp4me
Posts: 20
Joined: Sun Mar 22, 2015 11:34 pm

Re: Is this an index fund?

Post by cfp4me » Sat Apr 18, 2015 11:57 am

1. Answer is "No"
2. As other posters have said it sounds more like an 'indexed-annuity', an insurance product, rather than a mutual fund
3. If your friend specifically asked his Financial Advisor about an indexed mutual fund and this was the advise he got, then ask your friend to run and not stop till he is at least 4 blocks away from this advisor's office

dbr
Posts: 23391
Joined: Sun Mar 04, 2007 9:50 am

Re: Is this an index fund?

Post by dbr » Sat Apr 18, 2015 12:14 pm

cfp4me wrote:1. Answer is "No"
2. As other posters have said it sounds more like an 'indexed-annuity', an insurance product, rather than a mutual fund
3. If your friend specifically asked his Financial Advisor about an indexed mutual fund and this was the advise he got, then ask your friend to run and not stop till he is at least 4 blocks away from this advisor's office


That is for sure. This is almost certainly an equity indexed annuity which resembles an index fund about like, well I am stymied for an example of anything more mistaken. I would also wager that the friend did not hear or understand what the adviser actually said as even annuity salesmen can't get away with actually telling a lie like that if they did.

Comment 3 above is especially pertinent because if it is really true then that is as shoddy as it gets without being actually criminal.

Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Is this an index fund?

Post by Professor Emeritus » Sat Apr 18, 2015 12:57 pm

:twisted: :twisted:
It is unfortunate that the people who peddle this stuff do not get what they deserve
:twisted: :twisted:
Last edited by Professor Emeritus on Sat Apr 18, 2015 2:33 pm, edited 1 time in total.

User avatar
LadyGeek
Site Admin
Posts: 40516
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Is this an index fund?

Post by LadyGeek » Sat Apr 18, 2015 1:02 pm

Perhaps, but let's give the OP some time to get the information.

Facts first, then we'll "politely" explain :wink: why we're stomping all over it.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

chessmannextmove
Posts: 278
Joined: Mon Feb 23, 2015 1:57 pm

Re: Is this an index fund?

Post by chessmannextmove » Sat Apr 18, 2015 5:46 pm

It sounds like an indexed annuity with options protecting the withdrawal basis. It's all about the value offered by the protection (downside stopped at zero) vs the value of what you're exchanging for it (added cost over buying an equivalent index fund). That's the theoretical question. In practice your friend will probably pay a premium for it. But maybe not.

User avatar
cheese_breath
Posts: 7299
Joined: Wed Sep 14, 2011 7:08 pm

Re: Is this an index fund?

Post by cheese_breath » Sat Apr 18, 2015 5:56 pm

Agree with the other posters. This is an indexed annuity, and the FA (salesman) who called it an index fund is either ignorant or dishonest to call it an index fund. That's reason enough to stay away from him.
The surest way to know the future is when it becomes the past.

Jim180
Posts: 316
Joined: Wed Jun 26, 2013 9:47 pm

Re: Is this an index fund?

Post by Jim180 » Sat Apr 18, 2015 8:44 pm

The dead giveaway is that it offers downside protection. No true index fund can offer downside protection. Only an annuity can do that, FOR A PRICE!

chessmannextmove
Posts: 278
Joined: Mon Feb 23, 2015 1:57 pm

Re: Is this an index fund?

Post by chessmannextmove » Sat Apr 18, 2015 8:54 pm

The problem with these annuities is typically you don't get the dividends of the index (i am not aware of an index annuity product that does give you the dividend). That's huge. There are non commission sellers of annuities.
As i understand it they don't necessarily buy an index fund underneath. They could just buy and sell options to set caps and floors. The vanilla B-S options formula assumes option prices are on the underlying asset minus dividends. If you were to include dividends the cost of the options would be higher. So that's why it seems expensive. You're buying options plus a guarantee. It's actually fair. The problem really falls on the inferior tax treatment annuities get. Sure you get to defer taxes but so what!? You end up paying ordinary income tax rates for equity returns minus dividends minus commissions minus mortality and administrative expenses... No thank you. All for a hedge on longevity risk. The alternative is living a frugal life style and investing a lot, early, and often. That's my hedge for possibly living long. But sometimes, for some people, it may be too late and they may not be able to save enough. Annuities offers a solution at a premium... Which is fair i suppose. After all, the great sale goes to the person who is willing to go out of their way to find it.

denovo
Posts: 3405
Joined: Sun Oct 13, 2013 1:04 pm

Re: Is this an index fund?

Post by denovo » Sun Apr 19, 2015 4:37 pm

Be a good friend and tell him to give this financial advisor the boot.

User avatar
Bogle_Feet
Posts: 826
Joined: Tue Jan 14, 2014 6:56 pm

Re: Is this an index fund?

Post by Bogle_Feet » Tue Apr 21, 2015 5:33 am

grizzoola wrote:A financial advisor told my friend about what he called an index fund.

Your friend needs to learn the difference between a fiduciary adviser and a non-fiduciary. You get what you pay for. He went to a "free" guy and now he's being urged to invest in expensive financial products that pay Mr Financial Adviser the biggest back-door commissions (at your friend's expense).

Then he needs to learn how painfully easy it is to just invest in a couple of stock and bond index funds and then rebalance as needed. Done.

Index annuities are one the worst possible places you can put your money and then your money is stuck there for a very long time. Here's what he almost locked his money in... http://yourinvestmentadvise.com/index-annuity.html

User avatar
bertilak
Posts: 5613
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Is this an index fund?

Post by bertilak » Tue Apr 21, 2015 6:27 am

dbr wrote:
cfp4me wrote:1. Answer is "No"
2. As other posters have said it sounds more like an 'indexed-annuity', an insurance product, rather than a mutual fund
3. If your friend specifically asked his Financial Advisor about an indexed mutual fund and this was the advise he got, then ask your friend to run and not stop till he is at least 4 blocks away from this advisor's office


That is for sure. This is almost certainly an equity indexed annuity which resembles an index fund about like, well I am stymied for an example of anything more mistaken.

Like a butterfly resembles a butter knife?
Listen very carefully. I shall say this only once. (There! I've said it.)

User avatar
Shackleton
Posts: 225
Joined: Mon Dec 29, 2014 6:20 pm

Re: Is this an index fund?

Post by Shackleton » Tue Apr 21, 2015 6:40 am

bertilak wrote:
dbr wrote:
cfp4me wrote:1. Answer is "No"
2. As other posters have said it sounds more like an 'indexed-annuity', an insurance product, rather than a mutual fund
3. If your friend specifically asked his Financial Advisor about an indexed mutual fund and this was the advise he got, then ask your friend to run and not stop till he is at least 4 blocks away from this advisor's office


That is for sure. This is almost certainly an equity indexed annuity which resembles an index fund about like, well I am stymied for an example of anything more mistaken.

Like a butterfly resembles a butter knife?


Like comparing apples and orange-roughy. One of them stinks.
“Superhuman effort isn't worth a damn unless it achieves results.” ~Ernest Shackleton

toto238
Posts: 1877
Joined: Wed Feb 05, 2014 2:39 am

Re: Is this an index fund?

Post by toto238 » Tue Apr 21, 2015 11:46 am

Shackleton wrote:
bertilak wrote:
dbr wrote:
cfp4me wrote:1. Answer is "No"
2. As other posters have said it sounds more like an 'indexed-annuity', an insurance product, rather than a mutual fund
3. If your friend specifically asked his Financial Advisor about an indexed mutual fund and this was the advise he got, then ask your friend to run and not stop till he is at least 4 blocks away from this advisor's office


That is for sure. This is almost certainly an equity indexed annuity which resembles an index fund about like, well I am stymied for an example of anything more mistaken.

Like a butterfly resembles a butter knife?


Like comparing apples and orange-roughy. One of them stinks.


Like comparing an Orange to an Orangutan?

Post Reply