Style Purity

Index funds are created according to specific criteria, and in accordance with an index, allowing for accurate tracking and prevention of style drift. Figure 6-8 shows the style purity of an S&P 500 Index Fund over a 32-year period. In contrast to the drift of the three previous funds, the index fund maintained relatively constant exposure to large growth and large value equities over the entire period.

Figure 6-8

The Standard & Poor's Indices versus Active Funds Scorecard1 (SPIVA®) is a report that provides information on the consistency or "persistence" of funds staying true to their styles. Data from the year-end 2013 report is shown in Figure 6-9, revealing the inconsistency or lack of persistence in the list of funds from 2009 through 2013. Looking at the active domestic equity funds tracked by Standard and Poor's, only 48.57% remained style consistent over the five-year period.

Investors should carefully review Morningstar data to determine if a fund has a history of adhering to its stated investment style. Because passively managed index funds adhere to their styles, they provide investors with consistent risk exposure and the assurance their funds will stay true to their purpose.

Figure 6-9

    -1 S&P Indices, Research and Design, "Standard and Poor's Indices Versus Active Funds Scorecard (SPIVA), Year-End 2011)," (2012).
Step 6Standard & Poor Indices versus Active Funds ScorecardSPIVAMagellan Fund