Academics have long talked up the advantages of broad index funds. But it wasn't until the stock market's spectacular runup of the past four years that individuals began to catch on. Wilshire Associates Inc., a money manager based in Santa Monica, Calif., itself launched a Wilshire 5000 fund on Feb. 1. Brokerage firms and mutual-fund groups insist that in today's overheated stock market, investors need savvy managers more than ever to find the few remaining bargains. Index funds, by contrast, make no attempt to snap up winners and jettison losers.
Computers simply tell traders to buy stocks in proportions matching their representation in indexes.
Because it may be the best you can do long term, say academics and others who believe markets are so sophisticated that stock prices instantly reflect new information. The record strongly supports their view. In this supercompetitive environment, the only investors with a sure advantage are those trading on illegal information. Online brokerages, which depend on investors who make their own decisions, are also jumping on the bandwagon. A slew of specialized stock indexes are in development, paving the way for even more index-fund products.