TY - JOUR T1 - The Best Index for the Thoughtful Indexer JF - ETFs and Indexing SP - 99 LP - 104 VL - 2006 IS - 1 AU - Gary L. Gastineau Y1 - 2006/09/21 UR - http://guides.pm-research.com/content/2006/1/99.abstract N2 - If an investor resists the siren song of proposals to concentrate risks in the hope of superior returns, choosing a single appropriate broad market index (and by extension a single low total cost stock-index fund) can be a relatively easy task. The transaction costs of implementing changes in popular indexes with limited capitalization ranges are a direct penalty to the performance of an indexed portfolio. These transaction costs are the result of a traffic jam caused by many traders trying to travel a narrow road at the same time – compounded by the efforts of “smart” investors to take advantage of the trades imposed on investors that are tracking the index closely. The best way for an investor to avoid the performance penalty associated with changes in over-popular benchmark indexes is to use a different index and a different approach to indexation. The very low turnover in the Dow Jones Wilshire 5000 Index reduces the likely tax impact of capital gains distributions from a conventional mutual fund under most likely scenarios. Nonetheless, a taxable investor should always choose a pure exchange-traded fund to have virtual assurance of avoiding capital gains distributions and deferring all capital gains until the fund shares are sold. ER -