10-26-2014, 09:01 AM
(10-25-2014, 07:04 PM)KenBob Wrote: Why can't an index be split into an undervalued bucket and an overvalued bucket? With a "bucket fund", all purchases are made for the undervalued bucket, while sales are made from the overvalued bucket.
The glib answer to this question is that then it would not be an index fund. One of the main appeals of indexing is the removal of subjective buy and sell decisions, which allows the fund to track the underlying index closely with very low costs (that is, low expense ratio).
There are passively managed index funds that track an underlying value index, such as the Vanguard Value Index Fund. But since the underlying index is already constructed with a certain valuation profile, the index fund itself does not need to be separated into buckets; it simply tracks its benchmark. (And of course whoever is constructing the benchmark is making the decisions as to what constitutes a "value" stock.)
There are plenty of actively managed mutual funds that do exactly what you are saying. They may not use the "buckets" concept that you describe, but they have their team of analysts looking to buy undervalued stocks and sell overvalued ones. They may or may not succeed, but you'll pay for those services via a higher expense ratio.