Enhanced Index Fund or EIF

Enhanced Index Funds or EIFs are mutual funds which track stock market indices but try to beat normal market returns. EIFs do so by modifying position sizes and market timing, investing extensively in certain securities, excluding some market segments, and/or carefully using leverage. Enhanced index funds falls into the category of Active Index Funds.

Where normal index funds and ETFs try to profit by going inline with their tracking market index by passive management of portfolio and low fees, enhanced index funds often change their investing preferences to beat the tracking index. This active management demands higher fees. Conventional index funds only have market risk – the risk as a result of market volatility; but enhanced index funds also have management risk – the risk associated with ineffective fund management.

Advantages of enhanced index funds include higher return, lower expense ratio than mutual funds, and semi-active fund management. Disadvantages include higher risk and higher expense ratio than index funds. As EIFs are new to the market, there is no enough performance history to evaluate them. Investors are recommended to choose an enhanced index fund only after thorough understanding of their active management methodologies.

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