I see that there are multiple no-load, low-fee mutual index funds that attempt to track the S&P. Some of these funds do a better job of tracking the index than others. Would it be beneficial at all to invest in more than one mutual index fund of the same index? Or, due to transaction costs, is this not effective?
This question is asked from the long term (10-30 years) perspective.
Some index funds offer lower expense ratios to those who invest large amounts of money. For example, Vanguard offers Admiral Shares of many of its mutual funds (including several index funds) to individuals who invest more than $50K or $100K, and these Shares have lower expense ratios than the Investor shares in the fund. There are Institutional Shares designed for investments by pension plans, 401k plans of large companies etc which have even lower expenses than Admiral Shares. Individuals working for large companies sometimes get access to Institutional Shares through their 401k plans. Thus, there is something to gained by investing in just one index fund (for a particular index) that offers lower expense ratios for large investments instead of diversifying into several index funds all tracking the same index. Of course, this advantage might be offset by failure to track the index closely, but this tracking should be monitored not on a daily basis but over much longer periods of time to test whether your favorite fund is perennially trailing the index by far more than its competitors with larger expense ratios. Remember that the Net Asset Value (NAV) published by each mutual fund after the markets close already take into account the expense ratio.
I could see doing this if the investments were via different environments. The choices in a 401K are limited by the plan, so you might want to put new money into the 401K index fund. At the same time you could have IRA money invested in a similar index. You could even have non-retirement money invested.
While you should look at all your investments while evaluating your investment percentages, the 401K (limited options) and the non-retirement account (avoiding taxes) might be harder to move around.
Otherwise the only advantage of splitting between funds is avoiding having all your money in a Ponzi scheme.
No, there is no real advantage. The discrepancies in how they track the index will (generally) be so small that this provides very, very limited diversification, while increasing the complexity of your investments.
